Depreciation: Accounting Notes for CS Professional

Depreciation – Study Notes (CS Professional – Accounting)

Depreciation is the systematic allocation of the cost of a long‑term asset (e.g., machinery, vehicles, buildings) over its useful life.

Why? To match the expense of using the asset to the revenue it helps generate.
Result? The asset’s book value on the balance sheet declines over time, and a depreciation expense is recorded on the income statement.

Concept	What It Means	How It’s Applied
Cost of Asset	Purchase price + installation + delivery	`Cost = Purchase Price + Installation + Delivery + Other Costs`
Useful Life	Expected period the asset will be productive	Estimate in years or months
Residual (Salvage) Value	Estimated value at end of useful life	`Salvage Value = Estimated sale price at end of life`
Depreciation Methods	Determines the expense pattern	Straight‑line, Declining balance, Units‑of‑production, Sum‑of‑the‑years‑digits
Capitalization vs. Expense	When to record the cost	Capitalize if > $500 (or other thresholds)
Tax vs. Accounting Depreciation	Differences in rules	Tax depreciation may use accelerated methods (e.g., MACRS in the U.S.)
Accumulated Depreciation	Cumulative depreciation against the asset	`Accumulated Dep = Sum of yearly expenses`
Net Book Value	Asset Cost – Accumulated Dep	`NBV = Cost – Accumulated Dep`
Impairment	Sudden loss of value	Write‑off if NBV > recoverable amount

Method	Formula (per year)	Typical Use
Straight‑Line (SL)	((\text{Cost} - \text{Salvage}) / \text{Useful Life})	Most common, equal expense
Declining Balance (DB)	(\text{Rate} \times \text{NBV}_{\text{begin}})	Accelerated; often 150% or 200% DB
Units‑of‑Production (UoP)	((\text{Cost} - \text{Salvage}) \times \frac{\text{Actual Units}}{\text{Total Expected Units}})	Dependent on usage
Sum‑of‑the‑Years‑Digits (SYD)	((\text{Cost} - \text{Salvage}) \times \frac{\text{Remaining Life}}{\text{Sum of Years}})	Accelerated, fixed pattern

Sum of Years for a life of (n) years: ( \frac{n(n+1)}{2}).

Scenario

[ \text{Cost Basis} = $48{,}000 + $1{,}200 = $49{,}200 ]

[ \text{Annual Dep} = \frac{49{,}200 - 6{,}000}{5} = \frac{43{,}200}{5} = $8{,}640 ]

Date	Account	Debit	Credit
1 Jan 2023	Delivery Van	$49,200	–
–	Cash	–	$49,200

Year‑end 31 Dec 2023

Date	Account	Debit	Credit
31 Dec 2023	Depreciation Expense	$8,640	–
–	Accumulated Depreciation – Van	–	$8,640

Year	Depreciation Expense	Accumulated Dep	NBV
2024	$8,640	$17,280	$32,920
2025	$8,640	$25,920	$23,280
2026	$8,640	$34,560	$14,640
2027	$8,640	$43,200	$5,760

(Stop when NBV ≈ Salvage Value.)

Topic	Key Takeaway
Depreciation Purpose	Allocates asset cost to matching revenue periods.
Cost Basis	Purchase price + installation + delivery + other capitalizable costs.
Useful Life	Estimated productive period; drives expense schedule.
Residual Value	Expected end‑value; reduces total depreciable amount.
Straight‑Line	Equal yearly expense; simplest calculation.
Declining Balance	Accelerated expense; higher early years.
Units‑of‑Production	Expense tied to actual usage.
SYD	Accelerated, fixed declining pattern.
Accumulated Depreciation	Contra‑asset account; reduces book value.
Net Book Value	Current book value = Cost – Accumulated Dep.
Impairment	Write‑off if carrying amount > recoverable amount.

Always check the asset’s useful life – it may change due to technology or policy updates.
Remember the "rule of thumb": 80% of the asset cost is typically depreciable.
Keep depreciation schedules in a spreadsheet for audit trails.
**Align depreciation