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About this document
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- 3 pages
- Price
- $3 one-time, yours to keep
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- Format
- Subject
- Accounting, Finance
- Module
- Week 4 · Week 4
This document explains the differences between depreciation, amortization and depletion in financial accounting. It is for Week 4 of the XACC 291 course.
What's inside
- Depreciation of fixed assets
- Amortization of prepayments and intangible assets
- Depletion in mining, timber, petroleum industries
- Methods of calculating depreciation, amortization and depletion
- Differences between depreciation, amortization and depletion
Who it is for: Students of the XACC 291 course. (Undergraduate)
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Summary
Depreciation, amortization and depletion are accounting methods for spreading the cost of assets over time. Students learn how these methods differ and when to use each one.
Depreciation of fixed assets
Depreciation applies to physical assets like property and equipment. It uses the straight line method to calculate the cost to spread over the asset's useful life.
Amortization of intangible assets
Amortization applies to intangible assets and prepayments. It spreads the cost over the asset's useful life or a shorter period. Prepayments are short-term assets.
Depletion of natural resources
Depletion applies to natural resources like minerals and timber. It accounts for the reduction of reserves. It uses the cost method or the percentage method.
Methods for depletion
Companies may use different depletion methods for accounting and tax purposes. The cost method allocates costs over the asset's life. The percentage method uses gross income.
Key terms
- Straight line method
- A method for calculating depreciation by dividing the cost of the asset by its useful life.
- Intangible assets
- Assets that do not have a physical form, such as patents or trademarks.
- Prepayments
- Payments made in advance for goods or services to be received in the future.
- Cost method
- A depletion method that allocates the cost of a natural resource over its life.
- Percentage method
- A depletion method that uses a percentage of gross income to account for the reduction of reserves.
- Accelerated method
- A method that allows for faster depreciation of an asset for tax purposes.
Questions this document helps with
- When should depreciation be used instead of amortization?
- What is the difference between the cost method and the percentage method?
- How do companies use different depletion methods for tax returns?
Summary written with AI from the document's text.
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