DEPRECIABLE ASSETS

Depreciable assets are those assets that can be written down in the books of accounts over a period of time for tax and accounting purposes according to the Internal Revenue Service (IRS) rules. Depreciation reduces the book value of the assets. The depreciable assets are long term assets i.e., they have a life for more than one year. 

The depreciation for these assets is accounted through the useful life of these assets. These assets should be used for business and not for personal use. It must be something that the person claiming the depreciation owns. The assets should be used in an income-producing activity. There are various methods adopted for calculating the depreciation, useful life span, the terminal value of the asset, etc. 

Plant, property and equipment being tangible assets can be depreciated while the ones such as copyright, trademark, etc. which are intangible can be amortized. 

There are five methods used for depreciation which are: 

1. Straight Line Method 
2. Unit of Production Method 
3. Reducing balance Method 
4. Double declining balancing Method 
5. Sum-of the year’s digit Method

Every Company can choose a Method of Depreciation according to their own convenience and once they choose a particular method, they have to continue using the same, if they decide to follow another method, they clearly have to state reasons as to why there was a change in the method used for that year. The method chosen also largely depends on the type of the asset, its cost, the salvage value, the estimated useful life of the asset, etc.

Out of all the methods used, the Straight Line Method is the most popular one and used maximum by the Companies. The choice of the depreciation method can largely reflect on the revenues mentioned in the Income Statement and the assets that are mentioned in the Balance Sheet.