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When a fixed asset is acquired by a company, it is recorded at cost (generally, cost is equal to the
purchase price of the asset). This cost is recognized as an asset and not expense.
The cost is to be allocated as expense to the periods in which the asset is used. This is done by recording
depreciation expense.
There are two types of depreciation physical and functional depreciation.
Physical depreciation results from wear and tear due to frequent use and/or exposure to elements like
rain, sun and wind.
Functional or economic depreciation happens when an asset becomes inadequate for its purpose or
becomes obsolete. In this case, the asset decreases in value even without any physical deterioration.
31 Depreciation Expense
Accumulated Depreciation
6,000.00
6,000.00
2014
2015
2016
2013
6,000
12,000
18,000
24,000
30,000
Notice that at the end of the useful life of the asset, the carrying value is equal to the residual value.
$ 4,500
6,000
6,000
6,000
6,000
1,500
$ 30,000