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Depreciating the Finer Things in Life
Figure 6-1:
Earning
extra money
in an
investment.
Depreciating the Finer Things in Life
Depreciation is the technique of allocating the cost of an asset over the
useful period that the asset is used. Depreciation is applied to capital assets,
tangible goods that provide usefulness for a year or more.
Vehicles, buildings, and equipment are the type of assets that depreciation
can be applied to. A tuna sandwich is not a capital asset because its
usefulness is going to last for just the few minutes it takes someone to eat it —
although the person eating it may expect to capitalize on it!
Take the example of a business purchasing a delivery truck. The truck costs
$35,000. It’s expected to be used for 12 years; this is known as the life of the
asset. At the end of 12 years, the vehicle’s estimated worth will be $8,000.
These figures follow certain terminology used in the depreciation formulas:
Cost: This is the initial cost of the item ($35,000). This could include not
just the price of the item but costs associated with getting and installing
the item, such as delivery costs.
Salvage: This is the value of the item at the end of the useful life of the
item ($8,000).
Life: This is the number of periods that the depreciation is applied to.
This is usually expressed in years (in this case, 12 years).
Depreciation is calculated in different ways. Some techniques assume that
an asset provides the majority of its usefulness during the earlier periods of
its life. Depreciation in this case is applied on a sliding scale from the first
period to the last. The bulk of the depreciation gets applied in the first few
periods. This is known as an accelerated depreciation schedule. Sometimes
the depreciation amount runs out sooner than the asset’s life. Alternatively,
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