Accounting and Finance for Lawyers Depreciation Depreciation is allocating the upfront cost of an asset over multiple years to better match its cost of the asset against when its benefit is acquired. This is basically consuming the asset through wear and tear.
Depreciation goes from the historical cost to the scrap value over the asset 's expected useful life.
Delivery, installation, and improvement costs are included in an asset 's historical cost amount.
Scrap value is what the asset can be sold for at the end of its useful life.
Depreciation must be accounted in contra account s to avoid messing up the historical costs of asset s on the balance sheet .
Contra Account A contra account is an account that keeps track of the depreciation or bad debt expense that accumulates for an asset .
A credit to a contra account essentially decreases the value of the opposed asset while keeping the original value.
Example
On the balance sheet , the accumulated depreciation will be listed below the fixed asset s, and the resultant book value under that.
Account
Amount
Equipment
9000
Accumulated Depreciation
1000
Book Value
9000
Straight Line Method
Depreciation Expense
=
Cost
−
Scrap Value
Useful Life
Sum of the Years' Digits Method SYD depreciation multiplies the cost minus the scrap value by a fraction based on the years.
Example Fractions Over Five Years
5
+
4
+
3
+
2
+
1
=
15
Year 1:
5
15
Year 2:
4
15
Year 3:
3
15
Year 4:
2
15
Year 5:
1
15
Double Declining Method The double declining method depreciates by taking the percent of the useful life the year is, doubling it, and multiplying it by the opening balance.
Note that unlike the others, scrap value does not change this depreciation every year. It just cannot depreciate it below such value.
Example
Year
Historical Cost
Opening Balance
Depreciation Expense (20%)
Accumulated Depreciation
Book Value
1
$100,000
$100,000 $20,000 $20,000 $80,000
2
$100,000
$80,000 $16,000 $36,000 $64,000
3
$100,000
$64,000 $12,800 $48,800 $51,200
4
$100,000
$51,200 $10,240 $59,040 $40,960
5
$100,000
$40,960 $8,192 $67,232 $32,768
6
$100,000
$32,768 $6,554 $73,786 $26,214
7
$100,000
$26,214 $5,243 $79,028 $20,972
8
$100,000
$20,972 $972 $80,000 $20,000
9
$100,000
$20,000 $0 $80,000 $20,000
10
$100,000
$20,000 $0 $80,000 $20,000