Wize University Introduction to Financial Accounting Textbook > Long-Term Assets
Depreciation and Amortization
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Depreciation and Amortization
Depreciation and amortization is necessary for a company to respect the matching principle. Since long-term assets are used for longer than a year, the costs incurred need to be spread out over time.
Depreciation and Amortization Expense
- Represents the portion of the assets cost that was used in the current period.
- Depreciation expense is used for tangible assets (property, plant and equipment)
- Amortization expense is used for intangible assets
Factors that Affect Depreciation
- Useful life: How long the company estimates it will use the asset for.
- For intangible assets, cost is amortized over the shorter of the useful life or the legal life.
- Residual value: The value the company estimates will remain at the end of the asset's life, also called salvage value.
- Depreciation method: The type of depreciation used, typically depends on the type of asset.
- Straight-line method
- Declining-balance method
- Units of production method
Accumulated Depreciation
- Contra-asset
- Represents the total amount of depreciation on an asset since it was acquired.
- Decreases the carrying value of an asset.
Journalizing Depreciation
- Adjusting journal entry
- Debit depreciation expense
- Credit accumulated depreciation of specific asset
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Amortization Table
The amortization table is a useful tool for organizing and keeping track of the depreciation or amortization of a company's assets.
For each year the asset has been owned, it shows the:
- Cost
- Any additional capital expenditures are added to cost in the year they occur
- Annual depreciation
- Accumulated depreciation
- Carrying Value
- Cost - Accumulated depreciation
