Depreciation of Assets

In accounting, the process of allocating in a systematic and rational manner the cost of certain items of assets (these are mainly capital assets) over the period of its useful life is known as depreciation. There are three main types of depreciation causing the decrease in value of an asset: 1) physical depreciation, 2) moral depreciation, 3) deterioration.

In the process of production the capital assets gradually wear out, thus after a definite period of time they have to be replaced. This is known as their physical depreciation.

However, capital assets are also subject to moral depreciation, that is after serving for some period of time, they may become obsolete before they are physically worn out and have to be replaced by more up-to-date means of production. Such obsolescence of the assets is caused by technological changes and by the introduction of new and better machinery and methods of production. Obsolescence can also be caused by the commodity produced by the asset, for example, if it goes out of fashion. In the latter case, the degree of obsolescence will depend on the specific nature of the asset. Sometimes assets can be easily adapted to alternative uses while others may have only one application.

Deterioration means a change in value of an asset because of the effects of nature, for example, for machinery this might be rust, for building it is connected with decadence, for farm land it is caused by erosion.

In accounting, it is important to know depreciation of the capital assets as it increases the company’s expenses, so two main methods are used by accountants in calculating periodic depreciation. The most widely used is the straight-line method, in which the rate of depreciation is constant for the entire working life of the capital assets. According to the second method known as accelerated depreciation method, the depreciation rate in the first years of asset use is greater than in the later years.

Comments:

1. deterioration – пошкодження, зношення

2. obsolescence – зношеність

3. decadence – погіршення

4. rust – іржа

5. straight-line method – метод рівномірного обчислення зношення

6. accelerated depreciation method – прискорений метод обчислення

зношення