PROVISION FOR DEPRECIATION

Property, plant and equipment (fixed assets)

help generating more revenues

depreciation

the expense that will be matched for these revenues

Expired cost of the fixed assets

*all fixed assets except land are depreciable assets

*land is not depreciable because it is useful for indefinite period of time

Two kinds of depreciation:

Physical depreciation – results to the ultimate retirement of the property or termination of the service
of the asset because of wear and tear due to frequent use, passage of time due to non-use, action
elements (wind, sunshine, rain or dust)

Functional or economic depreciation – arises form obsolescence or inadequacy of the assets to perform
efficiently – asset is said to be obsolete when there are already new models or inventions

Methods of computing depreciation:

Straight line method

Net book value or carrying value

Difference between the cost of the asset and its contra-asset account

Scrap or salvage value

Estimated price that a fixed asset can be sold at the end of its economic life