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A plant asset's cost is depreciated, unless the asset is land.

Cost is defined as the cash or cash equivalent amount at the time of the transaction. This means that the asset's cost is the cash amount plus the note's present value at time that the asset is purchased.

To illustrate this, let's assume that equipment is purchased by GIVING $50,000 of cash plus a promissory note of $100,000. If the note has an interest rate that is a fair rate considering the MARKET rates and the riskiness of the party SIGNING the note, then the present value of the note is $100,000. The equipment will then be recorded at its cost of $150,000. This cost of $150,000 will be depreciated over the equipment's useful life.

If the note specifies zero interest, then the present value of the note is less than $100,000. Let's assume that the note's present value is computed to be $90,000. This means that the asset's cost will be $140,000—the cash of $50,000 plus the note's $90,000 of present value. ASSUMING no salvage value, the total DEPRECIATION expense over the life of the equipment will equal $140,000. The $10,000 difference will be reported as interest expense over the life of the note.

A plant asset's cost is depreciated, unless the asset is land.

Cost is defined as the cash or cash equivalent amount at the time of the transaction. This means that the asset's cost is the cash amount plus the note's present value at time that the asset is purchased.

To illustrate this, let's assume that equipment is purchased by giving $50,000 of cash plus a promissory note of $100,000. If the note has an interest rate that is a fair rate considering the market rates and the riskiness of the party signing the note, then the present value of the note is $100,000. The equipment will then be recorded at its cost of $150,000. This cost of $150,000 will be depreciated over the equipment's useful life.

If the note specifies zero interest, then the present value of the note is less than $100,000. Let's assume that the note's present value is computed to be $90,000. This means that the asset's cost will be $140,000—the cash of $50,000 plus the note's $90,000 of present value. Assuming no salvage value, the total depreciation expense over the life of the equipment will equal $140,000. The $10,000 difference will be reported as interest expense over the life of the note.

For the company's financial statements, the economic life of the ASSET should be used—not the years of USEFUL life required for income tax purposes. In other words, the Internal Revenue Service (IRS) might stipulate that certain equipment is to be depreciated on the income tax return over 7 years. However, the company knows that the equipment will be useful in PRODUCING REVENUES for 10 years. Accounting's matching principle requires that the company's financial statements MATCH the equipment's costs to its revenues over a 10-year period. (This will result in the most accurate measurement of the company's accounting net income.)

However, on the tax return the company must follow the IRS rules and will depreciate the asset over 7 years. Obviously, this will result in two sets of depreciation amounts. (Further, the company's financial statements can use straight-line depreciation over the 10 years while the income tax return is using an accelerated method of depreciation over the 7 years.)

The difference in each year's depreciation is referred to as a timing difference. The reason is that over the life of the equipment, the total amount of depreciation expense is likely to be the same. It is just a matter of timing as to when that total amount is reported on the financial statements versus the income tax returns.

For the company's financial statements, the economic life of the asset should be used—not the years of useful life required for income tax purposes. In other words, the Internal Revenue Service (IRS) might stipulate that certain equipment is to be depreciated on the income tax return over 7 years. However, the company knows that the equipment will be useful in producing revenues for 10 years. Accounting's matching principle requires that the company's financial statements match the equipment's costs to its revenues over a 10-year period. (This will result in the most accurate measurement of the company's accounting net income.)

However, on the tax return the company must follow the IRS rules and will depreciate the asset over 7 years. Obviously, this will result in two sets of depreciation amounts. (Further, the company's financial statements can use straight-line depreciation over the 10 years while the income tax return is using an accelerated method of depreciation over the 7 years.)

The difference in each year's depreciation is referred to as a timing difference. The reason is that over the life of the equipment, the total amount of depreciation expense is likely to be the same. It is just a matter of timing as to when that total amount is reported on the financial statements versus the income tax returns.

If the cement work was done to repair or maintain existing cement work, then the expenditure should be recorded as an expense. Even if the COST is very large, repairs and maintenance MUST be expensed. The cost of repairs or maintenance cannot be recorded as an asset.

If the cement work is an addition or an IMPROVEMENT (more than repairing or maintaining existing cement work), the cost of the cement work is viewed as a NEW asset. If the amount is significant, you should record the expenditure as an asset and then depreciate the cost over the useful life. However, if the amount of the addition or the improvement is relatively small, the ACCOUNTING concept of materiality allows you to expense the entire amount immediately.

If the cement work was done to repair or maintain existing cement work, then the expenditure should be recorded as an expense. Even if the cost is very large, repairs and maintenance must be expensed. The cost of repairs or maintenance cannot be recorded as an asset.

If the cement work is an addition or an improvement (more than repairing or maintaining existing cement work), the cost of the cement work is viewed as a new asset. If the amount is significant, you should record the expenditure as an asset and then depreciate the cost over the useful life. However, if the amount of the addition or the improvement is relatively small, the accounting concept of materiality allows you to expense the entire amount immediately.

It is necessary to allocate a lump sum payment to INDIVIDUAL items in order to record a fair portion of the lump sum in each of the proper general LEDGER accounts.

For instance, let's assume that a CORPORATION made a lump sum payment of $450,000 in order to acquire a building, the land on which the building sits, and also some equipment. The lump sum payment MEANS that the total cost of $450,000 has to be allocated among three general ledger accounts: Land, Buildings, and Equipment. The allocation must be done in a logical manner for the following reasons:

1. the portion of the lump sum cost that is recorded in the Land ACCOUNT will not be depreciated
2. the portion of the lump sum cost that is recorded in the Buildings account might be depreciated over a 25-year period, and
3. the portion of the lump sum cost that is recorded in the Equipment account might be depreciated over 7 years.

It is necessary to allocate a lump sum payment to individual items in order to record a fair portion of the lump sum in each of the proper general ledger accounts.

For instance, let's assume that a corporation made a lump sum payment of $450,000 in order to acquire a building, the land on which the building sits, and also some equipment. The lump sum payment means that the total cost of $450,000 has to be allocated among three general ledger accounts: Land, Buildings, and Equipment. The allocation must be done in a logical manner for the following reasons:

Repairing and maintaining office EQUIPMENT is an immediate expense. This is true EVEN if the REPAIR cost is a very large amount.

If a large expenditure is made to improve office equipment, that cost would be recorded as an asset and then depreciated over the remaining life of the equipment.

SMALL expenditures to improve office equipment are usually expensed immediately because of the materiality concept. This means the amount is so small that no one will be misled by having the entire amount appear immediately as an expense rather than appearing as depreciation expense over several YEARS. Often improvements of less than $500 or $1,000 are considered immaterial and are expensed immediately.

Repairing and maintaining office equipment is an immediate expense. This is true even if the repair cost is a very large amount.

If a large expenditure is made to improve office equipment, that cost would be recorded as an asset and then depreciated over the remaining life of the equipment.

Small expenditures to improve office equipment are usually expensed immediately because of the materiality concept. This means the amount is so small that no one will be misled by having the entire amount appear immediately as an expense rather than appearing as depreciation expense over several years. Often improvements of less than $500 or $1,000 are considered immaterial and are expensed immediately.

Illusory profit, also called phantom profit, is the difference between 1) the profit reported USING historical costs required by US GAAP, and 2) the profit computed using replacement costs. Illusory profit is greatest during PERIODS of rising costs at companies with significant amounts of inventory and plant assets.

For example, when inventory is MEASURED by using the first-in, first-out cost flow ASSUMPTION under US GAAP, the actual historical cost of inventory that is charged to the cost of goods sold during periods of rising costs is smaller than the amount computed using replacement costs. This smaller amount of costs charged to the income STATEMENT means reporting greater profit. The difference in the profit is said to be illusory.

In the case of plant assets used during periods of rising costs, the depreciation expense reported on the income statement based on historical costs (required by US GAAP) will be less than the depreciation computed by using the higher replacement cost of the plant assets. The additional profit from this difference in depreciation is considered to be illusory profit.

Illusory profit, also called phantom profit, is the difference between 1) the profit reported using historical costs required by US GAAP, and 2) the profit computed using replacement costs. Illusory profit is greatest during periods of rising costs at companies with significant amounts of inventory and plant assets.

For example, when inventory is measured by using the first-in, first-out cost flow assumption under US GAAP, the actual historical cost of inventory that is charged to the cost of goods sold during periods of rising costs is smaller than the amount computed using replacement costs. This smaller amount of costs charged to the income statement means reporting greater profit. The difference in the profit is said to be illusory.

In the case of plant assets used during periods of rising costs, the depreciation expense reported on the income statement based on historical costs (required by US GAAP) will be less than the depreciation computed by using the higher replacement cost of the plant assets. The additional profit from this difference in depreciation is considered to be illusory profit.

Using accelerated depreciation on the income tax return will MEAN greater depreciation expense and smaller taxable income in the EARLIER YEARS of an asset's life. However, it will be followed by smaller depreciation expense and greater taxable income in the later years of the asset's life.

For a corporation with consistent taxable income, the use of accelerated depreciation on the income tax return instead of the straight-line method, will defer some income tax until the later years of an asset's life. Over the entire life of the asset, the total depreciation expense is the same. The METHODS merely affect the timing of the depreciation.

It is also IMPORTANT to note that a corporation may use the straight-line method on its financial statements and at the same time use accelerated depreciation on its income tax returns. The differences in income taxes resulting from using different methods are referred to as timing differences or temporary differences.

Using accelerated depreciation on the income tax return will mean greater depreciation expense and smaller taxable income in the earlier years of an asset's life. However, it will be followed by smaller depreciation expense and greater taxable income in the later years of the asset's life.

For a corporation with consistent taxable income, the use of accelerated depreciation on the income tax return instead of the straight-line method, will defer some income tax until the later years of an asset's life. Over the entire life of the asset, the total depreciation expense is the same. The methods merely affect the timing of the depreciation.

It is also important to note that a corporation may use the straight-line method on its financial statements and at the same time use accelerated depreciation on its income tax returns. The differences in income taxes resulting from using different methods are referred to as timing differences or temporary differences.

In 1979 the Financial Accounting Standards Board (FASB) issued its Statement of Financial Accounting Standards No. 33 entitled Financial Reporting and Changing Prices. (You will find the original Statement No. 33 on www.FASB.org.) In short, Statement No. 33 REQUIRED large companies to report supplementary information on the effects of changing prices on its inventory and its property, plant and equipment. (In the late 1970's the U.S. was experiencing double-digit inflation rates and the SEC was advocating the reporting of replacement cost.)

One disclosure required by Statement 33 was the reporting of the effects of general inflation as INDICATED by the change in the consumer price INDEX. In other words, a large company had to disclose in the NOTES to its financial statements some key amounts after adjusting inventory and property, plant and equipment amounts for the changes in the purchasing power of the U.S. dollar. The second disclosure reported the effects of the changes in the specific prices of inventory and property, plant and equipment.

In 1986 the FASB issued its Statement No. 89 which no longer required the reporting of the information. As a result, most companies stopped the calculations and reporting. Two of the factors in deciding to stop the calculations was the lack of use by financial analysts and a DECLINE in the rates of inflation in the U.S. In other words, the accounting for price level changes failed to pass the cost/benefit test.

In 1979 the Financial Accounting Standards Board (FASB) issued its Statement of Financial Accounting Standards No. 33 entitled Financial Reporting and Changing Prices. (You will find the original Statement No. 33 on www.FASB.org.) In short, Statement No. 33 required large companies to report supplementary information on the effects of changing prices on its inventory and its property, plant and equipment. (In the late 1970's the U.S. was experiencing double-digit inflation rates and the SEC was advocating the reporting of replacement cost.)

One disclosure required by Statement 33 was the reporting of the effects of general inflation as indicated by the change in the consumer price index. In other words, a large company had to disclose in the notes to its financial statements some key amounts after adjusting inventory and property, plant and equipment amounts for the changes in the purchasing power of the U.S. dollar. The second disclosure reported the effects of the changes in the specific prices of inventory and property, plant and equipment.

In 1986 the FASB issued its Statement No. 89 which no longer required the reporting of the information. As a result, most companies stopped the calculations and reporting. Two of the factors in deciding to stop the calculations was the lack of use by financial analysts and a decline in the rates of inflation in the U.S. In other words, the accounting for price level changes failed to pass the cost/benefit test.

No. A FULLY DEPRECIATED asset cannot be revalued because of accounting's cost principle, matching principle, and going concern assumption.

For instance, let's assume that a company purchased a building 30 years ago at a cost of $600,000. The company then depreciated the building at a rate of $20,000 per year for 30 years. Today the building continues to be used by the company and it plans to continue using it for many more years. The company's current balance sheet will report the building at its cost of $600,000 minus its accumulated depreciation of $600,000. In other words, the building will be reported at its book value of $0.

The cost principle prevents the company from recording and reporting more than its actual cost of $600,000. The matching principle requires that only the actual cost of $600,000 can be allocated or matched to the years in which the company benefits from the use of the building. Lastly, the company is assumed to be a going concern and therefore it is not liquidating. Hence the amount that the company would receive if it sold the building is not APPROPRIATE for its financial statements.

EVEN if the building's current value is estimated to be $2 million, the financial statements must report the actual cost and the depreciation based on that cost—even if this MEANS reporting a book value of $0. It also means there will be no additional depreciation expense reported after the $600,000 of actual cost has been reported as depreciation expense.

No. A fully depreciated asset cannot be revalued because of accounting's cost principle, matching principle, and going concern assumption.

For instance, let's assume that a company purchased a building 30 years ago at a cost of $600,000. The company then depreciated the building at a rate of $20,000 per year for 30 years. Today the building continues to be used by the company and it plans to continue using it for many more years. The company's current balance sheet will report the building at its cost of $600,000 minus its accumulated depreciation of $600,000. In other words, the building will be reported at its book value of $0.

The cost principle prevents the company from recording and reporting more than its actual cost of $600,000. The matching principle requires that only the actual cost of $600,000 can be allocated or matched to the years in which the company benefits from the use of the building. Lastly, the company is assumed to be a going concern and therefore it is not liquidating. Hence the amount that the company would receive if it sold the building is not appropriate for its financial statements.

Even if the building's current value is estimated to be $2 million, the financial statements must report the actual cost and the depreciation based on that cost—even if this means reporting a book value of $0. It also means there will be no additional depreciation expense reported after the $600,000 of actual cost has been reported as depreciation expense.

A decrease in accumulated depreciation will occur when an asset is sold, scrapped, or retired. At that point, the asset's accumulated depreciation and its cost are REMOVED from the accounts. (The net of these two amounts—known as the book value or carrying value—is then COMPARED to the proceeds to determine if there is a gain or loss on the disposal.)

Some accounting TEXTBOOKS state that the cost of an EXPENDITURE that extends the useful life of an asset should be debited to the accumulated depreciation account instead of the asset account. Such an entry will also reduce the credit balance in the accumulated depreciation account.

A decrease in accumulated depreciation will occur when an asset is sold, scrapped, or retired. At that point, the asset's accumulated depreciation and its cost are removed from the accounts. (The net of these two amounts—known as the book value or carrying value—is then compared to the proceeds to determine if there is a gain or loss on the disposal.)

Some accounting textbooks state that the cost of an expenditure that extends the useful life of an asset should be debited to the accumulated depreciation account instead of the asset account. Such an entry will also reduce the credit balance in the accumulated depreciation account.

Systematic and rational allocation is a PHRASE often CITED in the definition of depreciation. In that context it means that the annual depreciation expense should be based on a FORMULA that is logical and acceptable to other unbiased accountants.

For example, depreciating an asset over a 10-year period with the same amount of depreciation expense each year is systematic and rational. Depreciating the asset on the basis of the number of parts it produces is also systematic and rational. HOWEVER, determining the annual depreciation expense based on each year's profits is not systematic and rational.

Systematic and rational allocation is a phrase often cited in the definition of depreciation. In that context it means that the annual depreciation expense should be based on a formula that is logical and acceptable to other unbiased accountants.

For example, depreciating an asset over a 10-year period with the same amount of depreciation expense each year is systematic and rational. Depreciating the asset on the basis of the number of parts it produces is also systematic and rational. However, determining the annual depreciation expense based on each year's profits is not systematic and rational.

Accelerated depreciation is the allocation of a plant asset's cost in a faster manner than the straight line depreciation. COMPARED to straight line depreciation, accelerated depreciation will mean 1) more depreciation in the earlier years of an asset's life and 2) less depreciation in the later years of the asset's life. [Note that the total amount of depreciation over the asset's life will be the same regardless of the depreciation method used.] Hence, the DIFFERENCE between accelerated depreciation and straight line depreciation is the timing of the depreciation.

THREE examples of accelerated depreciation methods include double-declining (200% declining) balance, 150% declining balance, and sum-of-the-years' digits (SYD).

The U.S. income tax regulations allow a business to use accelerated depreciation on its income tax return while using straight line depreciation on its financial statements. For profitable corporations this will likely result in deferred income tax payments being reported on its financial statements.

Accelerated depreciation is the allocation of a plant asset's cost in a faster manner than the straight line depreciation. Compared to straight line depreciation, accelerated depreciation will mean 1) more depreciation in the earlier years of an asset's life and 2) less depreciation in the later years of the asset's life. [Note that the total amount of depreciation over the asset's life will be the same regardless of the depreciation method used.] Hence, the difference between accelerated depreciation and straight line depreciation is the timing of the depreciation.

Three examples of accelerated depreciation methods include double-declining (200% declining) balance, 150% declining balance, and sum-of-the-years' digits (SYD).

The U.S. income tax regulations allow a business to use accelerated depreciation on its income tax return while using straight line depreciation on its financial statements. For profitable corporations this will likely result in deferred income tax payments being reported on its financial statements.

In depreciation, the mid-month convention means that an asset placed into service during a given month is assumed to have been placed into service in the middle of that month. For EXAMPLE, if you place a warehouse into service on October 6, you will assume it was placed into service in the middle of October and will record depreciation for half of the month of October. If a building is placed into service on October 23, you will assume it was placed into service in the middle of October and will record depreciation for half of the month of October.

The mid-month convention also applies to the disposal of an asset. This means that an asset that is disposed of on October 25 will be assumed to have been disposed of in the middle of October. If an asset is disposed of on October 3, it is also assumed that the asset was disposed of in the middle of October. In EITHER situation, depreciation will be RECORDED for half of the month of October.

The mid-month convention is pertinent for the income tax depreciation for certain property. You can find more on this in the Internal Revenue Service PUBLICATION 946.

In depreciation, the mid-month convention means that an asset placed into service during a given month is assumed to have been placed into service in the middle of that month. For example, if you place a warehouse into service on October 6, you will assume it was placed into service in the middle of October and will record depreciation for half of the month of October. If a building is placed into service on October 23, you will assume it was placed into service in the middle of October and will record depreciation for half of the month of October.

The mid-month convention also applies to the disposal of an asset. This means that an asset that is disposed of on October 25 will be assumed to have been disposed of in the middle of October. If an asset is disposed of on October 3, it is also assumed that the asset was disposed of in the middle of October. In either situation, depreciation will be recorded for half of the month of October.

The mid-month convention is pertinent for the income tax depreciation for certain property. You can find more on this in the Internal Revenue Service Publication 946.

The purchase of a new machine that will be used in a business will AFFECT the profit and loss statement, or income statement, when the machine is placed into service. At that point, depreciation expense will begin and there will likely be other expenses such as WAGES, maintenance, electricity, and so on.

Since the income statement reports only the expenses that match the revenues during the accounting period, the depreciation expense might be very small in the first accounting period compared to the amount SPENT for the machine. For example, if the machine is purchased half way into the accounting year and its cost was $300,000, the depreciation for that first accounting period might be only $15,000—assuming it has a 10 year life and no salvage value. In the next accounting period the depreciation expense will be $30,000 under the straight-line method.

If the machine is used by a MANUFACTURER, the depreciation, electricity, and maintenance of the machine will be recorded as manufacturing overhead. This overhead is then assigned to the products and will be held in inventory until the goods are sold. When the products are sold, these overhead costs will be reported on the income statement as part of the cost of goods sold.

The purchase of a new machine that will be used in a business will affect the profit and loss statement, or income statement, when the machine is placed into service. At that point, depreciation expense will begin and there will likely be other expenses such as wages, maintenance, electricity, and so on.

Since the income statement reports only the expenses that match the revenues during the accounting period, the depreciation expense might be very small in the first accounting period compared to the amount spent for the machine. For example, if the machine is purchased half way into the accounting year and its cost was $300,000, the depreciation for that first accounting period might be only $15,000—assuming it has a 10 year life and no salvage value. In the next accounting period the depreciation expense will be $30,000 under the straight-line method.

If the machine is used by a manufacturer, the depreciation, electricity, and maintenance of the machine will be recorded as manufacturing overhead. This overhead is then assigned to the products and will be held in inventory until the goods are sold. When the products are sold, these overhead costs will be reported on the income statement as part of the cost of goods sold.

Depletion is the MOVEMENT of the cost of natural resources from a company's balance sheet to its income statements. The objective is to match on the income STATEMENT the cost of the natural resources that were SOLD with the revenues of the natural resources that were sold. The cost of the natural resources sold is referred to as depletion expense.

Depletion is the movement of the cost of natural resources from a company's balance sheet to its income statements. The objective is to match on the income statement the cost of the natural resources that were sold with the revenues of the natural resources that were sold. The cost of the natural resources sold is referred to as depletion expense.

More than 60 years AGO, accountants in the U.S. used Reserve for Bad Debts as the title of the contra account associated with Accounts Receivable or Loans Receivable. They also used Reserve for Depreciation as the title of the contra account associated with PLANT assets. The use of the WORD reserve LED some readers of the financial STATEMENTS to conclude that money was set aside for replacing plant assets or the uncollectible accounts or loans.

To avoid this misunderstanding, the accounting profession recommended that the word reserve have a very limited use. Accountants now use Allowance for Doubtful Accounts or Allowance for Bad Debts instead of Reserve for Bad Debts. In the case of plant assets, Accumulated Depreciation is used in place of Reserve for Depreciation.

More than 60 years ago, accountants in the U.S. used Reserve for Bad Debts as the title of the contra account associated with Accounts Receivable or Loans Receivable. They also used Reserve for Depreciation as the title of the contra account associated with plant assets. The use of the word reserve led some readers of the financial statements to conclude that money was set aside for replacing plant assets or the uncollectible accounts or loans.

To avoid this misunderstanding, the accounting profession recommended that the word reserve have a very limited use. Accountants now use Allowance for Doubtful Accounts or Allowance for Bad Debts instead of Reserve for Bad Debts. In the case of plant assets, Accumulated Depreciation is used in place of Reserve for Depreciation.

The net book value of a noncurrent asset is the net amount reported on the balance sheet for a long-term asset.

To ILLUSTRATE net book value, let's assume that several years ago a company purchased equipment to be used in its business. The equipment's cost was $100,000 and its accumulated depreciation as of its recent balance sheet DATE was $40,000. This means that up to the balance sheet date $40,000 of the asset's cost had been reported as Depreciation Expense. It also means that the equipment's net book value is $60,000 ($100,000 of cost minus $40,000 of accumulated depreciation). Net book value or simply book value indicates that $60,000 of the noncurrent asset's cost has not yet been charged to depreciation expense.

Net book value or book value can also be associated with noncurrent ASSETS other than fixed assets. TWO EXAMPLES include long-term investments and unamortized bond issue costs.

The net book value of a noncurrent asset is the net amount reported on the balance sheet for a long-term asset.

To illustrate net book value, let's assume that several years ago a company purchased equipment to be used in its business. The equipment's cost was $100,000 and its accumulated depreciation as of its recent balance sheet date was $40,000. This means that up to the balance sheet date $40,000 of the asset's cost had been reported as Depreciation Expense. It also means that the equipment's net book value is $60,000 ($100,000 of cost minus $40,000 of accumulated depreciation). Net book value or simply book value indicates that $60,000 of the noncurrent asset's cost has not yet been charged to depreciation expense.

Net book value or book value can also be associated with noncurrent assets other than fixed assets. Two examples include long-term investments and unamortized bond issue costs.

An asset's useful life is the period of time (or total amount of activity) for which the asset will be economically feasible for use in a business. In other words, it is the period of time that the business asset will be in service and used to earn revenues.

Because of the advances in technology, an asset's useful life is often less than its physical life. For example, a computer may be useful for only three years even though it COULD PHYSICALLY be operated for decades.

The useful life (as well as the SALVAGE value at the END of the useful life) are estimated amounts needed in the calculation of the asset's depreciation. Depreciation is required so that the company's financial STATEMENTS comply with the matching principle.

In the U.S., income tax regulations specify the useful life that must be used for income tax reporting. This is one reason that in a given year the depreciation on a company's income tax return will not agree with the depreciation reported on its financial statements.

An asset's useful life is the period of time (or total amount of activity) for which the asset will be economically feasible for use in a business. In other words, it is the period of time that the business asset will be in service and used to earn revenues.

Because of the advances in technology, an asset's useful life is often less than its physical life. For example, a computer may be useful for only three years even though it could physically be operated for decades.

The useful life (as well as the salvage value at the end of the useful life) are estimated amounts needed in the calculation of the asset's depreciation. Depreciation is required so that the company's financial statements comply with the matching principle.

In the U.S., income tax regulations specify the useful life that must be used for income tax reporting. This is one reason that in a given year the depreciation on a company's income tax return will not agree with the depreciation reported on its financial statements.

The fixed asset TURNOVER ratio shows the RELATIONSHIP between the annual NET sales and the net amount of fixed assets.

The net amount of fixed assets is the amount of property, plant and equipment reported on the balance sheet after DEDUCTING the accumulated depreciation. Ideally, you should use the average amount of net fixed assets during the year of the net sales.

A corporation having property, plant and equipment with an average gross amount of $10 million and an average accumulated depreciation of $4 million would have average net fixed assets of $6 million. If its net sales were $18 million, its fixed asset turnover would be 3 ($18 million of net sales divided by $6 million of average net fixed assets).

The fixed asset turnover ratio shows the relationship between the annual net sales and the net amount of fixed assets.

The net amount of fixed assets is the amount of property, plant and equipment reported on the balance sheet after deducting the accumulated depreciation. Ideally, you should use the average amount of net fixed assets during the year of the net sales.

A corporation having property, plant and equipment with an average gross amount of $10 million and an average accumulated depreciation of $4 million would have average net fixed assets of $6 million. If its net sales were $18 million, its fixed asset turnover would be 3 ($18 million of net sales divided by $6 million of average net fixed assets).

Depreciation begins when you place an asset in service and it ends when you take an asset out of service or when you have expensed its cost, whichever comes first.

For financial statements, you are guided by the matching principle. The objective is to match the cost of the asset to the accounting periods in which revenues were earned by using the asset. There are TWO estimates needed: 1) the number of years that the asset will be used, and 2) the salvage value at the end of the asset's use. If an asset has a cost of $100,000 and is expected to be used for 10 years and then have no salvage value, most companies will depreciate the asset at the rate of $10,000 per year. This is known as the straight LINE method of depreciation.

For income tax purposes in the U.S., the Internal Revenue Service has determined the number of years that various assets will be USEFUL and it assumes there will be no salvage value. The IRS also allows companies to take larger depreciation deductions in the earlier years and smaller deductions in the later years of the assets' lives. This is known as accelerated depreciation.

As you probably noted from the above information, in any one year the depreciation expense on the financial statements will be DIFFERENT from the depreciation expense on the income tax return. However, over the life of an asset, the total depreciation expense will be the same. Accountants REFER to this as a timing difference.

Depreciation begins when you place an asset in service and it ends when you take an asset out of service or when you have expensed its cost, whichever comes first.

For financial statements, you are guided by the matching principle. The objective is to match the cost of the asset to the accounting periods in which revenues were earned by using the asset. There are two estimates needed: 1) the number of years that the asset will be used, and 2) the salvage value at the end of the asset's use. If an asset has a cost of $100,000 and is expected to be used for 10 years and then have no salvage value, most companies will depreciate the asset at the rate of $10,000 per year. This is known as the straight line method of depreciation.

For income tax purposes in the U.S., the Internal Revenue Service has determined the number of years that various assets will be useful and it assumes there will be no salvage value. The IRS also allows companies to take larger depreciation deductions in the earlier years and smaller deductions in the later years of the assets' lives. This is known as accelerated depreciation.

As you probably noted from the above information, in any one year the depreciation expense on the financial statements will be different from the depreciation expense on the income tax return. However, over the life of an asset, the total depreciation expense will be the same. Accountants refer to this as a timing difference.

The balance in the account Accumulated Depreciation will be reduced when an ASSET that has been depreciated is removed.

When an asset is sold, the depreciation EXPENSE is first recorded up to the date of the sale. Then the asset and its accumulated depreciation is removed and the proceeds are recorded.

Here's an EXAMPLE. A company has Equipment of $600,000 and Accumulated Depreciation of $380,000 before an item of equipment is sold. The original cost of the equipment being sold was $50,000. The first step is to record the current PERIOD's depreciation on that one item. Let's assume the depreciation will be $500. Let's also assume that after it is recorded, the item's accumulated depreciation will be $40,500. The company receives $5,000 for the equipment. The journal entry to record the disposal will consist of a debit to Cash for $5,000; a debit to Accumulated Depreciation for $40,500; a debit to Loss of Disposal of Asset for $4,500; a credit to Equipment for $50,000.

Prior to this TRANSACTION, the balance in the Accumulated Depreciation account was a credit balance of $380,000. The asset's current period depreciation of $500 increased the account's credit balance to $380,500. The disposal of the asset will reduce the balance in Accumulated Depreciation by $40,500 to a new balance of $340,000.

The balance in the account Accumulated Depreciation will be reduced when an asset that has been depreciated is removed.

When an asset is sold, the depreciation expense is first recorded up to the date of the sale. Then the asset and its accumulated depreciation is removed and the proceeds are recorded.

Here's an example. A company has Equipment of $600,000 and Accumulated Depreciation of $380,000 before an item of equipment is sold. The original cost of the equipment being sold was $50,000. The first step is to record the current period's depreciation on that one item. Let's assume the depreciation will be $500. Let's also assume that after it is recorded, the item's accumulated depreciation will be $40,500. The company receives $5,000 for the equipment. The journal entry to record the disposal will consist of a debit to Cash for $5,000; a debit to Accumulated Depreciation for $40,500; a debit to Loss of Disposal of Asset for $4,500; a credit to Equipment for $50,000.

Prior to this transaction, the balance in the Accumulated Depreciation account was a credit balance of $380,000. The asset's current period depreciation of $500 increased the account's credit balance to $380,500. The disposal of the asset will reduce the balance in Accumulated Depreciation by $40,500 to a new balance of $340,000.

Capital expenditures or capex are the amounts spent for tangible assets that will be used for more than one year in the operations of a business. Capital expenditures can be thought of as the amounts spent to acquire or IMPROVE a company's fixed assets. Some examples include the purchase of machinery, equipment, furniture, building improvements, computer information systems, and leasehold improvements.

The amount of capital expenditures for an accounting period is reported in the cash flow statement. The amount is an outflow of cash and is listed in the investing ACTIVITIES section of the statement. Sometimes the amount is listed as capital expenditures and sometimes it is listed as purchase of property and equipment.

The capital expenditures will also increase the respective asset accounts which are reported in the noncurrent asset section of the balance sheet entitled property, plant and equipment. Once the assets are placed in service they are DEPRECIATED over their useful lives. The accumulated depreciation for the assets is also reported as PART of the property, plant and equipment.

The current period's amount of capital expenditures is often subtracted from the cash from operating activities to arrive at the company's free cash flow.

Capital expenditures or capex are the amounts spent for tangible assets that will be used for more than one year in the operations of a business. Capital expenditures can be thought of as the amounts spent to acquire or improve a company's fixed assets. Some examples include the purchase of machinery, equipment, furniture, building improvements, computer information systems, and leasehold improvements.

The amount of capital expenditures for an accounting period is reported in the cash flow statement. The amount is an outflow of cash and is listed in the investing activities section of the statement. Sometimes the amount is listed as capital expenditures and sometimes it is listed as purchase of property and equipment.

The capital expenditures will also increase the respective asset accounts which are reported in the noncurrent asset section of the balance sheet entitled property, plant and equipment. Once the assets are placed in service they are depreciated over their useful lives. The accumulated depreciation for the assets is also reported as part of the property, plant and equipment.

The current period's amount of capital expenditures is often subtracted from the cash from operating activities to arrive at the company's free cash flow.

Yes, many companies USE two or more methods of depreciation.

It is acceptable and COMMON for companies to depreciate its plant ASSETS by using the straight LINE method on its financial statements, while using an accelerated method on its INCOME tax return.

A company could also be depreciating its equipment over ten years for its financial statements, while using seven years for its income tax return.

Even the depreciation for financial statements could consist of some assets being depreciated using the units of production or units of activity method, while other assets are depreciated using the straight line method.

Yes, many companies use two or more methods of depreciation.

It is acceptable and common for companies to depreciate its plant assets by using the straight line method on its financial statements, while using an accelerated method on its income tax return.

A company could also be depreciating its equipment over ten years for its financial statements, while using seven years for its income tax return.

Even the depreciation for financial statements could consist of some assets being depreciated using the units of production or units of activity method, while other assets are depreciated using the straight line method.

When long-term assets are sold, the amounts received are referred to as the proceeds.

If the amount of the proceeds is GREATER than the book value or carrying value of the long-term asset at the time of the sale, the difference is a GAIN on the sale or disposal. If the amount received is less than the book value, the difference is a loss on the sale or disposal. DEPRECIATION must be recorded up to the date of the disposal in order to have the asset's book value at the time of the sale.

On the statement of cash flows, the proceeds from the sale of long-term assets are reported in the investing activities section, while the gain on the sale appears in the operating activities section as a DEDUCTION from net income.

When long-term assets are sold, the amounts received are referred to as the proceeds.

If the amount of the proceeds is greater than the book value or carrying value of the long-term asset at the time of the sale, the difference is a gain on the sale or disposal. If the amount received is less than the book value, the difference is a loss on the sale or disposal. Depreciation must be recorded up to the date of the disposal in order to have the asset's book value at the time of the sale.

On the statement of cash flows, the proceeds from the sale of long-term assets are reported in the investing activities section, while the gain on the sale appears in the operating activities section as a deduction from net income.

Capitalize refers to adding an amount to the balance sheet. For example, certain interest from loans to self-construct a building will be added to the cost of the building. The building's cost including the capitalized interest will be recorded as an asset on the balance sheet.

DEPRECIATE refers to REDUCING an amount reported on the balance sheet. Depreciation is defined as systematically allocating the cost of a plant asset from the balance sheet and reporting it as depreciation EXPENSE on the income statement. If the building has a cost of $600,000 and a useful life of 30 years, then (assuming no salvage value and straight-line depreciation) each year $20,000 of cost is removed from the asset section of the balance sheet and will appear on the income statement as depreciation expense. (This in turn reduces OWNER's equity and keeps the balance sheet in balance.)

The interest on debt that is capitalized will not be expensed during the year of construction. Instead, it is added to the cost of the building (capitalized) and will be part of the ANNUAL depreciation expense occurring during the building's 30-year life.

In summary, capitalize means to add an amount to the balance sheet. Depreciate means to systematically remove an amount from the balance sheet during the asset's useful life.

Capitalize refers to adding an amount to the balance sheet. For example, certain interest from loans to self-construct a building will be added to the cost of the building. The building's cost including the capitalized interest will be recorded as an asset on the balance sheet.

Depreciate refers to reducing an amount reported on the balance sheet. Depreciation is defined as systematically allocating the cost of a plant asset from the balance sheet and reporting it as depreciation expense on the income statement. If the building has a cost of $600,000 and a useful life of 30 years, then (assuming no salvage value and straight-line depreciation) each year $20,000 of cost is removed from the asset section of the balance sheet and will appear on the income statement as depreciation expense. (This in turn reduces owner's equity and keeps the balance sheet in balance.)

The interest on debt that is capitalized will not be expensed during the year of construction. Instead, it is added to the cost of the building (capitalized) and will be part of the annual depreciation expense occurring during the building's 30-year life.

In summary, capitalize means to add an amount to the balance sheet. Depreciate means to systematically remove an amount from the balance sheet during the asset's useful life.

In accounting the terms depreciation, depletion and amortization often involve the movement of costs from the balance sheet to the income statement in a systematic and logical manner.

For EXAMPLE, the systematic expensing of the cost of assets such as buildings, EQUIPMENT, furnishings and vehicles is known as depreciation. The systematic expensing of the cost of natural resources is referred to as depletion. The systematic expensing of other long-term costs such as bond ISSUE costs and organization costs is referred to as amortization.

Depreciation, depletion and amortization are also described as noncash expenses, since there is no cash OUTLAY in the years that the expense is reported on the income statement. As a result, these expenses are added back to the net income reported in the operating activities section of the statement of cash flows when it is prepared under the indirect method.

The term amortization is also used to INDICATE the systematic reduction in a loan balance resulting from a predetermined schedule of interest and principal payments.

In accounting the terms depreciation, depletion and amortization often involve the movement of costs from the balance sheet to the income statement in a systematic and logical manner.

For example, the systematic expensing of the cost of assets such as buildings, equipment, furnishings and vehicles is known as depreciation. The systematic expensing of the cost of natural resources is referred to as depletion. The systematic expensing of other long-term costs such as bond issue costs and organization costs is referred to as amortization.

Depreciation, depletion and amortization are also described as noncash expenses, since there is no cash outlay in the years that the expense is reported on the income statement. As a result, these expenses are added back to the net income reported in the operating activities section of the statement of cash flows when it is prepared under the indirect method.

The term amortization is also used to indicate the systematic reduction in a loan balance resulting from a predetermined schedule of interest and principal payments.

In the U.S. the use of the word reserve has been discouraged for several decades. In its PLACE, the accounting profession has recommended the use of words such as allowance, accumulated, or provision. For INSTANCE, many years ago the contra account to a PLANT asset may have been titled Depreciation Reserve.

To some readers, that name implied that cash had been set aside to replace the asset. To better COMMUNICATE reality, the accounting profession recommended a more descriptive title such as Accumulated Depreciation. Similarly, the contra account to Accounts Receivable may have been titled Reserve for Bad Debts. Again, that title could imply that money was set aside. To avoid misinterpretation, the accounting profession suggested Allowance for Bad Debts or Provision for Bad Debts.

The word provision might appear in the title of a contra account as we just noted. In addition, provision will occasionally appear in the title of an expense account, such as Provision for INCOME Taxes.

In the U.S. the use of the word reserve has been discouraged for several decades. In its place, the accounting profession has recommended the use of words such as allowance, accumulated, or provision. For instance, many years ago the contra account to a plant asset may have been titled Depreciation Reserve.

To some readers, that name implied that cash had been set aside to replace the asset. To better communicate reality, the accounting profession recommended a more descriptive title such as Accumulated Depreciation. Similarly, the contra account to Accounts Receivable may have been titled Reserve for Bad Debts. Again, that title could imply that money was set aside. To avoid misinterpretation, the accounting profession suggested Allowance for Bad Debts or Provision for Bad Debts.

The word provision might appear in the title of a contra account as we just noted. In addition, provision will occasionally appear in the title of an expense account, such as Provision for Income Taxes.

Some people state that depreciation is a source of funds or a source of cash. 

Depreciation expense is reported as a positive amount on the statement of cash flows PREPARED under the popular indirect method. However, the REASON it is listed is to adjust the net income amount that had been reduced by depreciation expense on the income statement. (Recall that the depreciation entry debits Depreciation Expense and credits Accumulated Depreciation—the cash ACCOUNT is not involved.) In other words, the positive depreciation amount reported on the statement of cash flows is merely one of the adjustments needed to convert the accrual net income to the cash provided from operating activities. Depreciation is not a source of cash.

Let's illustrate this with some amounts. A sidewalk florist operates a cash only business. During the most recent year, this florist had cash revenues of $100,000. Its expenses included $70,000 of cash expenses and $8,000 of depreciation expense on its truck that was purchased in an earlier year. During the year there were no other revenues or expenses, and the florist's cash balance increased by $30,000. The florist's income statement will report net income of $22,000 (revenues of $100,000 minus expenses of $78,000).

The florist's statement of cash flows prepared under the indirect method will begin with net income of $22,000. It will then add the $8,000 of depreciation expense. The result is cash provided by operating activities of $30,000—which agrees to the business's change in its cash balance.

The $8,000 of depreciation expense was not a source of cash, even THOUGH it appears as a positive amount on the statement of cash flows.

Editor's note: A reader's comment points out that the depreciation on the income tax return will reduce taxable income and that in TURN will likely reduce the amount of cash paid for income taxes. This reduction in income taxes is a source of cash.

Some people state that depreciation is a source of funds or a source of cash. 

Depreciation expense is reported as a positive amount on the statement of cash flows prepared under the popular indirect method. However, the reason it is listed is to adjust the net income amount that had been reduced by depreciation expense on the income statement. (Recall that the depreciation entry debits Depreciation Expense and credits Accumulated Depreciation—the cash account is not involved.) In other words, the positive depreciation amount reported on the statement of cash flows is merely one of the adjustments needed to convert the accrual net income to the cash provided from operating activities. Depreciation is not a source of cash.

Let's illustrate this with some amounts. A sidewalk florist operates a cash only business. During the most recent year, this florist had cash revenues of $100,000. Its expenses included $70,000 of cash expenses and $8,000 of depreciation expense on its truck that was purchased in an earlier year. During the year there were no other revenues or expenses, and the florist's cash balance increased by $30,000. The florist's income statement will report net income of $22,000 (revenues of $100,000 minus expenses of $78,000).

The florist's statement of cash flows prepared under the indirect method will begin with net income of $22,000. It will then add the $8,000 of depreciation expense. The result is cash provided by operating activities of $30,000—which agrees to the business's change in its cash balance.

The $8,000 of depreciation expense was not a source of cash, even though it appears as a positive amount on the statement of cash flows.

Editor's note: A reader's comment points out that the depreciation on the income tax return will reduce taxable income and that in turn will likely reduce the amount of cash paid for income taxes. This reduction in income taxes is a source of cash.

Most companies will not use the double-declining BALANCE method of depreciation on their financial statements. The REASON is that it causes the company's net income in the early years of an asset's life to be lower than it would be under the straight-line method.

One reason for using double-declining balance depreciation on the financial statements is to have a consistent combination of depreciation expense and REPAIRS and maintenance expense during the life of the asset. In other words, in the early years of the asset's life, when the repairs and maintenance expenses are LOW, the depreciation expense will be high. In the later years of the asset's life, when the repairs and maintenance expenses are high, the depreciation expense will be low. While this seems logical, the company will end up reporting lower net income in the early years of the asset's life (as COMPARED to the use of straight-line depreciation). Most managers will not accept reporting lower net income sooner than required.

Most companies will not use the double-declining balance method of depreciation on their financial statements. The reason is that it causes the company's net income in the early years of an asset's life to be lower than it would be under the straight-line method.

One reason for using double-declining balance depreciation on the financial statements is to have a consistent combination of depreciation expense and repairs and maintenance expense during the life of the asset. In other words, in the early years of the asset's life, when the repairs and maintenance expenses are low, the depreciation expense will be high. In the later years of the asset's life, when the repairs and maintenance expenses are high, the depreciation expense will be low. While this seems logical, the company will end up reporting lower net income in the early years of the asset's life (as compared to the use of straight-line depreciation). Most managers will not accept reporting lower net income sooner than required.

The units of activity depreciation is one of several methods of depreciation. The units of activity method of depreciation is unique in that a plant asset's useful life is expressed in the total units that are expected to be produced or the asset's total activity during its life. The asset's cost is then allocated to the accounting PERIODS based on the plant asset's usage, units produced, activity, etc. Years and partial years are not relevant when using this depreciation method. (The other methods of depreciation express the plant asset's useful life in years and will allocate the plant asset's cost based on the mere passage of those years. Under these methods partial years are relevant.)

To illustrate the units of activity method of depreciation, LET's assume that a company acquires a finishing machine that is expected to PERFORM the finishing OPERATION on a total of 100,000 units of product. The machine has a cost of $225,000 and is expected to have a salvage value of $25,000. Under the units of activity method, the company will RECORD $2 of depreciation whenever it finishes a product. The $2 is computed as follows: ($225,000 - $25,000) divided by the expected 100,000 units of product. In an accounting year when 8,000 units are finished, the depreciation will be $16,000. In a year when 23,000 units are finished, the depreciation will be $46,000. The depreciation will continue until a total of $200,000 of depreciation has been taken (and the book value will be $25,000).

The units of activity depreciation is one of several methods of depreciation. The units of activity method of depreciation is unique in that a plant asset's useful life is expressed in the total units that are expected to be produced or the asset's total activity during its life. The asset's cost is then allocated to the accounting periods based on the plant asset's usage, units produced, activity, etc. Years and partial years are not relevant when using this depreciation method. (The other methods of depreciation express the plant asset's useful life in years and will allocate the plant asset's cost based on the mere passage of those years. Under these methods partial years are relevant.)

To illustrate the units of activity method of depreciation, let's assume that a company acquires a finishing machine that is expected to perform the finishing operation on a total of 100,000 units of product. The machine has a cost of $225,000 and is expected to have a salvage value of $25,000. Under the units of activity method, the company will record $2 of depreciation whenever it finishes a product. The $2 is computed as follows: ($225,000 - $25,000) divided by the expected 100,000 units of product. In an accounting year when 8,000 units are finished, the depreciation will be $16,000. In a year when 23,000 units are finished, the depreciation will be $46,000. The depreciation will continue until a total of $200,000 of depreciation has been taken (and the book value will be $25,000).

If the car CONTINUES to be used after it is fully DEPRECIATED, there will be no further depreciation entries.

If you sell the car after it is fully depreciated, you

1. debit Cash for the amount received,
2. debit ACCUMULATED Depreciation for the car's accumulated depreciation,
3. credit the asset account containing the car—such as Vehicles, Automobiles, or Cars,
4. credit the account Gain on Sale of Vehicles for the amount necessary to have the entry's debit dollars EQUAL to credit dollars.

If the EARLIER depreciation amounts assumed a salvage value of zero, the gain will equal the cash received.

If the car continues to be used after it is fully depreciated, there will be no further depreciation entries.

If you sell the car after it is fully depreciated, you

If the earlier depreciation amounts assumed a salvage value of zero, the gain will equal the cash received.

Accumulated Depreciation reports the amount of depreciation that has been taken from the time an asset was acquired until the DATE of the balance sheet. The COST of an asset minus its accumulated depreciation is the asset's carry value or book value.

Since depreciation is an allocation of an asset's cost based on the estimated useful life, you should not assume that the depreciation is an INDICATOR of what's occurring to the asset's market value. For EXAMPLE, a building in an excellent location may be increasing in value even though depreciation is taken. The present market value might be three times the original cost and yet the accumulated depreciation is now equal to the asset's cost—meaning its book value is $0.

The amount reported in Accumulated Depreciation merely reports the total amount of an asset's cost that has been sent over to the income statement as Depreciation EXPENSE since the asset was acquired.

Accumulated Depreciation reports the amount of depreciation that has been taken from the time an asset was acquired until the date of the balance sheet. The cost of an asset minus its accumulated depreciation is the asset's carry value or book value.

Since depreciation is an allocation of an asset's cost based on the estimated useful life, you should not assume that the depreciation is an indicator of what's occurring to the asset's market value. For example, a building in an excellent location may be increasing in value even though depreciation is taken. The present market value might be three times the original cost and yet the accumulated depreciation is now equal to the asset's cost—meaning its book value is $0.

The amount reported in Accumulated Depreciation merely reports the total amount of an asset's cost that has been sent over to the income statement as Depreciation Expense since the asset was acquired.

We charge depreciation because most of the long-lived assets used in a business have 1) a significant cost, and 2) they will be useful only for a limited number of years. The matching principle (a basic UNDERLYING accounting principle) REQUIRES that the actual cost of these assets be allocated to the accounting periods in which the COMPANY will benefit from their use.

The depreciation reported on a U.S. corporation's external financial statements is computed by spreading an asset's cost (less any salvage value) over the asset's service life or useful life. For example, equipment with a cost of $500,000 and no salvage value at the end of an assumed useful life of 10 years will likely result in matching $50,000 to each full accounting year. (The U.S. INCOME tax rules allow accelerating the depreciation amounts, but the total cannot exceed the asset's cost.)

Examples of the assets that must be DEPRECIATED include machinery, equipment, fixtures, furnishings, buildings, vehicles, etc. These assets are often referred to as fixed assets or plant assets, and the amounts spent are part of a corporation's capital expenditures. (Note that land is not depreciated because it is assumed to last indefinitely.)

We charge depreciation because most of the long-lived assets used in a business have 1) a significant cost, and 2) they will be useful only for a limited number of years. The matching principle (a basic underlying accounting principle) requires that the actual cost of these assets be allocated to the accounting periods in which the company will benefit from their use.

The depreciation reported on a U.S. corporation's external financial statements is computed by spreading an asset's cost (less any salvage value) over the asset's service life or useful life. For example, equipment with a cost of $500,000 and no salvage value at the end of an assumed useful life of 10 years will likely result in matching $50,000 to each full accounting year. (The U.S. income tax rules allow accelerating the depreciation amounts, but the total cannot exceed the asset's cost.)

Examples of the assets that must be depreciated include machinery, equipment, fixtures, furnishings, buildings, vehicles, etc. These assets are often referred to as fixed assets or plant assets, and the amounts spent are part of a corporation's capital expenditures. (Note that land is not depreciated because it is assumed to last indefinitely.)

In accounting, salvage value is an estimated amount that is expected to be received at the end of a plant asset's useful LIFE. Salvage value is sometimes referred to as disposal value, residual value, terminal value, or scrap value.

The estimated salvage value is DEDUCTED from the cost of the asset in order to determine the total amount of depreciation expense that will be reported during the asset's useful life.

Accountants and income tax regulations often assume that plant assets will have no salvage value. This will result in an asset's ENTIRE cost being depreciated during the YEARS that the asset is used in the BUSINESS.

In accounting, salvage value is an estimated amount that is expected to be received at the end of a plant asset's useful life. Salvage value is sometimes referred to as disposal value, residual value, terminal value, or scrap value.

The estimated salvage value is deducted from the cost of the asset in order to determine the total amount of depreciation expense that will be reported during the asset's useful life.

Accountants and income tax regulations often assume that plant assets will have no salvage value. This will result in an asset's entire cost being depreciated during the years that the asset is used in the business.

Examples of land improvements include paved parking areas, driveways, fences, outdoor lighting, and so on. Land improvements are RECORDED SEPARATELY from land, because land improvements have a LIMITED life and are depreciated. Land is assumed to last indefinitely and will not be depreciated.

Land improvements are recorded in a general ledger asset account entitled Land Improvements. The depreciation of land improvements will result in depreciation expense on the company's income tax return. This will reduce its taxable income and will reduce a profitable company's income tax PAYMENTS.

An example of a leasehold improvement is the permanent improvement to a building that is being rented under a 10 year lease. For instance, the tenant might construct permanent walls and offices inside of the warehouse that it leases from the owner. The lease will likely state that all improvements to the building will belong to the owner of the building. The amount spent by the tenant to improve the building will be recorded by the tenant in its asset account Leasehold Improvements. Generally, the amount of these leasehold improvements will be depreciated by the tenant over the useful life of the improvements or over the life of the lease, whichever is shorter. The depreciation expense associated with the leasehold improvements will reduce the tenant's taxable income and its income tax payments if the company is profitable.

Examples of land improvements include paved parking areas, driveways, fences, outdoor lighting, and so on. Land improvements are recorded separately from land, because land improvements have a limited life and are depreciated. Land is assumed to last indefinitely and will not be depreciated.

Land improvements are recorded in a general ledger asset account entitled Land Improvements. The depreciation of land improvements will result in depreciation expense on the company's income tax return. This will reduce its taxable income and will reduce a profitable company's income tax payments.

An example of a leasehold improvement is the permanent improvement to a building that is being rented under a 10 year lease. For instance, the tenant might construct permanent walls and offices inside of the warehouse that it leases from the owner. The lease will likely state that all improvements to the building will belong to the owner of the building. The amount spent by the tenant to improve the building will be recorded by the tenant in its asset account Leasehold Improvements. Generally, the amount of these leasehold improvements will be depreciated by the tenant over the useful life of the improvements or over the life of the lease, whichever is shorter. The depreciation expense associated with the leasehold improvements will reduce the tenant's taxable income and its income tax payments if the company is profitable.

Depreciation can be EITHER a direct cost or an indirect cost, or it can be both direct and indirect.

Let's illustrate this with the depreciation of a machine used in Department 23 of a manufacturer. The depreciation on that machine is a direct cost for Department 23. It is direct because it is traceable to Department 23 without any allocation.

The depreciation of this same machine will be an indirect cost of the products manufactured with that machine. It is indirect because the depreciation is ALLOCATED to the products. Perhaps the machine in Department 23 has depreciation of $50,000 per year (cost of machine of $500,000 divided by 10 years of useful life). The $50,000 of annual depreciation is then assigned or allocated to products based on the number of hours that products use the machine. For example, if the MANUFACTURE expects 20,000 machine hours of use in the current year, then it ASSIGNS or allocates $2.50 ($50,000/20,000) per machine hour to each product using the machine. If Product #189 requires one hour of this machine's time, Product #189 will have $2.50 as part of its indirect costs. Indirect manufacturing costs are also referred to as manufacturing overhead, factory overhead, or burden.

Depreciation can be either a direct cost or an indirect cost, or it can be both direct and indirect.

Let's illustrate this with the depreciation of a machine used in Department 23 of a manufacturer. The depreciation on that machine is a direct cost for Department 23. It is direct because it is traceable to Department 23 without any allocation.

The depreciation of this same machine will be an indirect cost of the products manufactured with that machine. It is indirect because the depreciation is allocated to the products. Perhaps the machine in Department 23 has depreciation of $50,000 per year (cost of machine of $500,000 divided by 10 years of useful life). The $50,000 of annual depreciation is then assigned or allocated to products based on the number of hours that products use the machine. For example, if the manufacture expects 20,000 machine hours of use in the current year, then it assigns or allocates $2.50 ($50,000/20,000) per machine hour to each product using the machine. If Product #189 requires one hour of this machine's time, Product #189 will have $2.50 as part of its indirect costs. Indirect manufacturing costs are also referred to as manufacturing overhead, factory overhead, or burden.

I will assume that the project under construction is a major rebuilding of equipment or an addition to a building. The amounts spent on these projects would be DEBITED to a LONG term asset account such as Construction Work in Progress. This account is often reported as the last line within the balance sheet classification PROPERTY, PLANT and Equipment.

There will be no depreciation until the project is completed and the asset is placed into SERVICE. When the completed asset is placed into service, the project's cost will be removed from the account Construction Work in Progress and will be debited to the appropriate plant asset account.

I will assume that the project under construction is a major rebuilding of equipment or an addition to a building. The amounts spent on these projects would be debited to a long term asset account such as Construction Work in Progress. This account is often reported as the last line within the balance sheet classification Property, Plant and Equipment.

There will be no depreciation until the project is completed and the asset is placed into service. When the completed asset is placed into service, the project's cost will be removed from the account Construction Work in Progress and will be debited to the appropriate plant asset account.

LAND is not depreciated because land is assumed to have an UNLIMITED useful life.

Other long-lived assets such as land improvements, buildings, FURNISHINGS, equipment, etc. have limited useful LIVES. THEREFORE, the costs of those assets must be allocated to those limited accounting periods. Since land's life is not limited, there is no need to allocate the cost of land to any accounting periods.

Land is not depreciated because land is assumed to have an unlimited useful life.

Other long-lived assets such as land improvements, buildings, furnishings, equipment, etc. have limited useful lives. Therefore, the costs of those assets must be allocated to those limited accounting periods. Since land's life is not limited, there is no need to allocate the cost of land to any accounting periods.

A revenue expenditure is a cost that is expensed in the accounting year in which it is incurred. In other words, the cost will be matched with the revenues of the accounting year in which the expenditure took place. (This is in contrast to a capital expenditure in which the cost is deferred to the balance sheet and is then expensed over several accounting years.)

Revenue expenditures are OFTEN DISCUSSED with costs spent on fixed assets after they have been placed in service. For example, the amount spent each year to keep an ice cream's store's equipment working EFFICIENTLY is a revenue expenditure. Also, the cost to repair the equipment will be a revenue expenditure. In both of these situations, the amounts spent will be debited to Repairs and Maintenance Expense and will be matched with the revenues on the current year's income statement.

On the other hand, if the ice cream store incurs a large cost to improve the equipment (to make it more than it had been) and/or to EXTEND the equipment's useful life, the amount spent is considered to be a capital expenditure. As such, the amount is INITIALLY deferred to the balance sheet (capitalized) and will be expensed over the current and future years of the equipment's useful life.

A revenue expenditure is a cost that is expensed in the accounting year in which it is incurred. In other words, the cost will be matched with the revenues of the accounting year in which the expenditure took place. (This is in contrast to a capital expenditure in which the cost is deferred to the balance sheet and is then expensed over several accounting years.)

Revenue expenditures are often discussed with costs spent on fixed assets after they have been placed in service. For example, the amount spent each year to keep an ice cream's store's equipment working efficiently is a revenue expenditure. Also, the cost to repair the equipment will be a revenue expenditure. In both of these situations, the amounts spent will be debited to Repairs and Maintenance Expense and will be matched with the revenues on the current year's income statement.

On the other hand, if the ice cream store incurs a large cost to improve the equipment (to make it more than it had been) and/or to extend the equipment's useful life, the amount spent is considered to be a capital expenditure. As such, the amount is initially deferred to the balance sheet (capitalized) and will be expensed over the current and future years of the equipment's useful life.

Straight line depreciation is likely to be the most common method of matching a plant asset's cost to the ACCOUNTING periods in which it is in service. Under the straight line method of depreciation, each full accounting year will be ALLOCATED the same amount or percentage of an asset's cost. (The total amount of depreciation over the YEARS of the asset's useful life will be the asset's cost minus any expected or ASSUMED salvage value.)

To illustrate straight line depreciation LET's assume that a company purchases equipment at a cost of $430,000 and it is expected to be used in the business for 10 years. At the end of the 10 years, the company expects to receive a salvage value of $30,000. Under the straight line method each full accounting year will be allocated $40,000 of depreciation, which is one-tenth (1/10) or 10% of the $400,000 that needs to be depreciated over the useful life of the equipment. If the asset is purchased in the middle of the accounting year there will be $20,000 of depreciation in the first and the eleventh accounting year and $40,000 in each of the years 2 through 10.

In the U.S. a company may use the straight line method for its financial statements while at the same time be using the Internal Revenue Service's faster depreciation on its federal income tax return.

Straight line depreciation is likely to be the most common method of matching a plant asset's cost to the accounting periods in which it is in service. Under the straight line method of depreciation, each full accounting year will be allocated the same amount or percentage of an asset's cost. (The total amount of depreciation over the years of the asset's useful life will be the asset's cost minus any expected or assumed salvage value.)

To illustrate straight line depreciation let's assume that a company purchases equipment at a cost of $430,000 and it is expected to be used in the business for 10 years. At the end of the 10 years, the company expects to receive a salvage value of $30,000. Under the straight line method each full accounting year will be allocated $40,000 of depreciation, which is one-tenth (1/10) or 10% of the $400,000 that needs to be depreciated over the useful life of the equipment. If the asset is purchased in the middle of the accounting year there will be $20,000 of depreciation in the first and the eleventh accounting year and $40,000 in each of the years 2 through 10.

In the U.S. a company may use the straight line method for its financial statements while at the same time be using the Internal Revenue Service's faster depreciation on its federal income tax return.

The cost of installation is part of the cost of the ASSET. An asset's cost is considered to be all of the costs of getting an asset in place and ready for USE. Therefore, the LABOR cost of installing a new machine is considered to be part of the asset's cost and not an immediate expense of the period.

The cost of the installation labor will include the workers' wages and the fringe benefits applicable to those wages.

The total cost of the asset, including installation costs, will be depreciated over the useful life of the asset.

The CONCEPT of materiality does ALLOW you to expense the installation cost immediately if the amount is insignificant.

The cost of installation is part of the cost of the asset. An asset's cost is considered to be all of the costs of getting an asset in place and ready for use. Therefore, the labor cost of installing a new machine is considered to be part of the asset's cost and not an immediate expense of the period.

The cost of the installation labor will include the workers' wages and the fringe benefits applicable to those wages.

The total cost of the asset, including installation costs, will be depreciated over the useful life of the asset.

The concept of materiality does allow you to expense the installation cost immediately if the amount is insignificant.

Leasehold improvements should be depreciated or amortized according to the lessee's normal depreciation policy except that the time period shall be the shorter of: 1) the useful life of the leasehold improvements, or 2) the REMAINING years of the lease. The remaining years of the lease include the years in the lease RENEWALS that are reasonably assured.

A discussion of your question was done by the Emerging Issues Task Force (EITF) of the Financial ACCOUNTING Standards Board (FASB).

Leasehold improvements should be depreciated or amortized according to the lessee's normal depreciation policy except that the time period shall be the shorter of: 1) the useful life of the leasehold improvements, or 2) the remaining years of the lease. The remaining years of the lease include the years in the lease renewals that are reasonably assured.

A discussion of your question was done by the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB).

In SHORT, transactions are first recorded in journals. From the journals the amounts are posted to the specified accounts in the general ledger.

Let's ILLUSTRATE the DIFFERENCE between entries to the general journal versus general ledger with the depreciation associated with a company's equipment.

The depreciation on equipment is first recorded in the general journal. A journal lists transactions in order by date and is defined as the book of original entry. To record depreciation on equipment in the amount of $10,000, the general journal will show a date, such as December 31, a debit to Depreciation Expense for $10,000 and a CREDIT to Accumulated Depreciation for $10,000.

The amounts in the general journal are then posted to the specified accounts, which are contained in the general ledger. In our example, the account Depreciation Expense will be debited as of December 31 for $10,000 and the account Accumulated Depreciation will be CREDITED as of December 31 for $10,000.

In short, transactions are first recorded in journals. From the journals the amounts are posted to the specified accounts in the general ledger.

Let's illustrate the difference between entries to the general journal versus general ledger with the depreciation associated with a company's equipment.

The depreciation on equipment is first recorded in the general journal. A journal lists transactions in order by date and is defined as the book of original entry. To record depreciation on equipment in the amount of $10,000, the general journal will show a date, such as December 31, a debit to Depreciation Expense for $10,000 and a credit to Accumulated Depreciation for $10,000.

The amounts in the general journal are then posted to the specified accounts, which are contained in the general ledger. In our example, the account Depreciation Expense will be debited as of December 31 for $10,000 and the account Accumulated Depreciation will be credited as of December 31 for $10,000.

The purpose of depreciation is to match the cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset. Since it is hard to see a direct link to revenues, the asset's cost is usually allocated to (ASSIGNED to, SPREAD over) the years in which the asset is used.

Depreciation systematically allocates or moves the asset's cost from the balance sheet to expense on the income STATEMENT over the asset's useful life. In other words, depreciation is an allocation process in order to achieve the matching principle; it is not a technique for determining the fair MARKET value of the asset.

The accounting entry for depreciation is a DEBIT to Depreciation Expense and a credit to Accumulated Depreciation (a contra-asset account that is reported in the same section of the balance sheet as the asset that is being depreciated).

The purpose of depreciation is to match the cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset. Since it is hard to see a direct link to revenues, the asset's cost is usually allocated to (assigned to, spread over) the years in which the asset is used.

Depreciation systematically allocates or moves the asset's cost from the balance sheet to expense on the income statement over the asset's useful life. In other words, depreciation is an allocation process in order to achieve the matching principle; it is not a technique for determining the fair market value of the asset.

The accounting entry for depreciation is a debit to Depreciation Expense and a credit to Accumulated Depreciation (a contra-asset account that is reported in the same section of the balance sheet as the asset that is being depreciated).

When EQUIPMENT that is used in a business is sold for cash before it is fully depreciated, there will be two journal ENTRIES:

The first entry will be a debit to Depreciation Expense and a credit to Accumulated Depreciation to record the depreciation right up to the date of the sale (disposal).

The SECOND entry will consist of the following:

1. Credit the account Equipment to remove the equipment's cost.
2. Debit Accumulated Depreciation to remove the equipment's up-to-date accumulated depreciation.
3. Debit Cash for the AMOUNT received.
4. Get this journal entry to balance. If a debit amount is needed, it is a loss on the disposal. If a credit amount is needed, it is a gain on the disposal.

If the equipment is traded-in or exchanged for ANOTHER asset, the second journal entry will be different from the one we presented.

When equipment that is used in a business is sold for cash before it is fully depreciated, there will be two journal entries:

The first entry will be a debit to Depreciation Expense and a credit to Accumulated Depreciation to record the depreciation right up to the date of the sale (disposal).

The second entry will consist of the following:

If the equipment is traded-in or exchanged for another asset, the second journal entry will be different from the one we presented.

We will use the FOLLOWING example to illustrate how to divide the cost of real estate into the cost of the land and the cost of the building. Assume that the entire cost of a real estate purchase is $220,000. The appraisal made at the time of the purchase indicates that the land has a market value of $50,000 and the building has a market value of $200,000...for a total market value of $250,000.

We can use the appraisal amounts for dividing the actual cost of $220,000 into the cost of the land and the cost of the building. There are two related techniques which will have the same results.

1. Since the appraisal report indicated that the land's value is $50,000 out of the $250,000 of total appraised value, we can assign 20% (50/250) of the total cost of $220,000 to the land, or $44,000. The building's appraised value is $200,000 out of the $250,000 total appraised value. Therefore we can assign 80% (200/250) of the total cost of $220,000 to the building, or $176,000.
2. The real estate's total cost of $220,000 is 88% of the total appraised value of $250,000. We can multiply the land's appraised value of $50,000 times 88% in order to get the cost of the land at $44,000. The building's appraised value of $200,000 times the 88% cost ratio equals the cost of land at $176,000.

A self-check of both calculations indicates the same COSTS: land at $44,000 PLUS the building at $176,000 equals the total actual cost of $220,000.

We did not deviate from the cost principle. We merely USED the appraised market values as a LOGICAL way to divide up the actual cost between the land and building. This assignment or allocation is necessary because the cost of the building used in a business will be depreciated, while the cost of the land is not depreciated.

We will use the following example to illustrate how to divide the cost of real estate into the cost of the land and the cost of the building. Assume that the entire cost of a real estate purchase is $220,000. The appraisal made at the time of the purchase indicates that the land has a market value of $50,000 and the building has a market value of $200,000...for a total market value of $250,000.

We can use the appraisal amounts for dividing the actual cost of $220,000 into the cost of the land and the cost of the building. There are two related techniques which will have the same results.

A self-check of both calculations indicates the same costs: land at $44,000 plus the building at $176,000 equals the total actual cost of $220,000.

We did not deviate from the cost principle. We merely used the appraised market values as a logical way to divide up the actual cost between the land and building. This assignment or allocation is necessary because the cost of the building used in a business will be depreciated, while the cost of the land is not depreciated.

Depreciation expense is the amount of depreciation that is reported on the income statement. In other words, it is the amount that pertains only to the period of time indicated in the heading of the income statement.

Accumulated depreciation is the total amount of depreciation that has been taken on a company's assets up to the date of the balance sheet. Accumulated depreciation is also the title of the contra asset account reported in the property, plant and EQUIPMENT section of the balance sheet. The accumulated depreciation for an individual asset is subtracted from the asset's cost in determining the asset's carrying value or book value.

To illustrate, let's assume that a retailer purchases new display racks at a cost of $84,000. This asset is estimated to have a useful life of 7 years (84 months), no salvage value, and will be depreciated USING the straight-line depreciation method. Therefore, during each month of the asset's life the retailer will report depreciation expense of $1,000. However, the accumulated depreciation will be reported on the balance sheet at $1,000 after the first month, $2,000 after the second month, $3,000 after the third month, and so on until it reaches $84,000 at the end of 84 months.

ASSUMING a manufacturer purchases manufacturing equipment for $84,000 with the same life and salvage value, the $1,000 of monthly depreciation will be part of manufacturing overhead (instead of being reported directly on the income statement as depreciation expense). As part of manufacturing overhead it will be allocated to the products manufactured. When the products are sold, their production COSTS (which INCLUDE their allocated share of depreciation and other manufacturing overhead costs) will be reported on the income statement as the cost of goods sold. The accumulated depreciation will be reported on the balance sheet just as it was for the retailer.

Depreciation expense is the amount of depreciation that is reported on the income statement. In other words, it is the amount that pertains only to the period of time indicated in the heading of the income statement.

Accumulated depreciation is the total amount of depreciation that has been taken on a company's assets up to the date of the balance sheet. Accumulated depreciation is also the title of the contra asset account reported in the property, plant and equipment section of the balance sheet. The accumulated depreciation for an individual asset is subtracted from the asset's cost in determining the asset's carrying value or book value.

To illustrate, let's assume that a retailer purchases new display racks at a cost of $84,000. This asset is estimated to have a useful life of 7 years (84 months), no salvage value, and will be depreciated using the straight-line depreciation method. Therefore, during each month of the asset's life the retailer will report depreciation expense of $1,000. However, the accumulated depreciation will be reported on the balance sheet at $1,000 after the first month, $2,000 after the second month, $3,000 after the third month, and so on until it reaches $84,000 at the end of 84 months.

Assuming a manufacturer purchases manufacturing equipment for $84,000 with the same life and salvage value, the $1,000 of monthly depreciation will be part of manufacturing overhead (instead of being reported directly on the income statement as depreciation expense). As part of manufacturing overhead it will be allocated to the products manufactured. When the products are sold, their production costs (which include their allocated share of depreciation and other manufacturing overhead costs) will be reported on the income statement as the cost of goods sold. The accumulated depreciation will be reported on the balance sheet just as it was for the retailer.

Depreciation could be an administrative expense, but it can also be a selling expense, and a part of the cost of manufacturer's products.

Where depreciation is reported DEPENDS on the assets being depreciated. For example, the depreciation on the building and FURNISHINGS of a COMPANY's central administrative staff is CONSIDERED an administrative expense. The depreciation on the sales staff's automobiles is considered part of the company's selling expenses. The depreciation on a manufacturer's factory and production equipment will be included in the overhead cost of the product. When a manufacturer's products are SOLD, some of the depreciation will be included in the cost of goods sold. When some of the manufactured products are held in inventory, some of the depreciation associated with the manufacturing process will be included in the cost of the inventory.

As you can see, depreciation is often part of many functions within a company. The company's depreciation should be assigned to each of the areas where the assets are utilized.

Depreciation could be an administrative expense, but it can also be a selling expense, and a part of the cost of manufacturer's products.

Where depreciation is reported depends on the assets being depreciated. For example, the depreciation on the building and furnishings of a company's central administrative staff is considered an administrative expense. The depreciation on the sales staff's automobiles is considered part of the company's selling expenses. The depreciation on a manufacturer's factory and production equipment will be included in the overhead cost of the product. When a manufacturer's products are sold, some of the depreciation will be included in the cost of goods sold. When some of the manufactured products are held in inventory, some of the depreciation associated with the manufacturing process will be included in the cost of the inventory.

As you can see, depreciation is often part of many functions within a company. The company's depreciation should be assigned to each of the areas where the assets are utilized.

The purchase of EQUIPMENT that will be used in a business is not reported on the profit and loss statement. HOWEVER, the depreciation of the equipment will be reported as depreciation expense on the profit and loss statements during the YEARS that the equipment is used.

For example, if a company buys equipment for $100,000 and it is expected to be used for 10 years, the company's profit and loss statements will report depreciation expense of $10,000 in each of the 10 years (assuming the straight-line method of depreciation is used).

The purchase of equipment is SHOWN on the statement of cash flows for the period in which the purchase took place. The equipment will also be reported on the company's balance sheets at its COST minus its accumulated depreciation.

The profit and loss statements are also known as income statements, statements of operations, and statements of earnings.

The purchase of equipment that will be used in a business is not reported on the profit and loss statement. However, the depreciation of the equipment will be reported as depreciation expense on the profit and loss statements during the years that the equipment is used.

For example, if a company buys equipment for $100,000 and it is expected to be used for 10 years, the company's profit and loss statements will report depreciation expense of $10,000 in each of the 10 years (assuming the straight-line method of depreciation is used).

The purchase of equipment is shown on the statement of cash flows for the period in which the purchase took place. The equipment will also be reported on the company's balance sheets at its cost minus its accumulated depreciation.

The profit and loss statements are also known as income statements, statements of operations, and statements of earnings.

In financial accounting, scrap value is associated with the depreciation of assets used in a BUSINESS. In this situation, scrap value is defined as the expected or estimated value of the asset at the end of its useful life. Scrap value is also referred to as an asset's salvage value or residual value. The following example illustrates how the scrap value is used.

A business acquires equipment at a COST of $150,000 and ESTIMATES that its scrap value will be $10,000 at the end of its useful life of 7 years. The ANNUAL straight-line depreciation expense will be $20,000 [($150,000 cost minus $10,000 scrap value) DIVIDED by 7 years]. Accountants and U.S. income tax regulations often assume that for the depreciation calculation the asset will have no scrap value. (If cash is received when the asset is scrapped, any amount that is in excess of the asset's carrying value will be reported as a gain.)

In cost accounting, scrap value often refers to the amount that a manufacturer will receive from materials or products that will be scrapped.

In financial accounting, scrap value is associated with the depreciation of assets used in a business. In this situation, scrap value is defined as the expected or estimated value of the asset at the end of its useful life. Scrap value is also referred to as an asset's salvage value or residual value. The following example illustrates how the scrap value is used.

A business acquires equipment at a cost of $150,000 and estimates that its scrap value will be $10,000 at the end of its useful life of 7 years. The annual straight-line depreciation expense will be $20,000 [($150,000 cost minus $10,000 scrap value) divided by 7 years]. Accountants and U.S. income tax regulations often assume that for the depreciation calculation the asset will have no scrap value. (If cash is received when the asset is scrapped, any amount that is in excess of the asset's carrying value will be reported as a gain.)

In cost accounting, scrap value often refers to the amount that a manufacturer will receive from materials or products that will be scrapped.