Discussion question - Depreciation Concepts

Anonymous
timer Asked: Jun 16th, 2014
account_balance_wallet $5

Question Description

What are the differences among valuation, depreciation, amortization, and depletion?

Tutor Answer

sobia
School: Purdue University

Valuation refers to determining a value for something. For accounting purposes, two common valuation options are fair market value and historical cost (net depreciation).

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Depreciation is an adjustment to the net income of an entity for wear and tear of fixed assets. The adjustment for depreciation is (in theory) to expense assets over the term of their useful lives.

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Amortization is an adjustment to the net income of an entity to expense costs of intangible assets over the estimated useful life of the asset (example: writing off the costs of a noncompete agreement over the life of the agreement).

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Depletion is an adjustment to the net income of an entity to record the use or harvesting of its petroleum, minerals, timber, or other reserves.

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Accumulated depreciation, accumulated amortization, and accumulated depletion accounts are kept as contra accounts to the historical acquisition price of fixed (tangible) assets being depreciated, intangible assets being amortized, and reserves being depleted.


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