Depreciation of Capital Assets

A capital asset is a long-term economic resource.

Accounting principles and regulatory rules require a firm to depreciate capital assets at the end of each month or quarter. These rules include Securities and Exchange Commission (SEC) guidelines and generally accepted accounting principles (GAAP).

Definitions

An asset is an economic resource that a company owns. A capital asset, also known as a long-term asset or fixed asset, is a resource that a firm intends to use in operating activities for more than 12 months. Examples include machinery, property and equipment. Depreciating a capital asset means spreading its cost over many years.

Accounting for Depreciation

To record a capital asset depreciation, an accountant debits the depreciation expense account and credits the accumulated depreciation account. Depreciation expense is a non-cash item, meaning the firm does not pay for it, unlike salaries and other administrative expenses.

Depreciation and Financial Reporting

An accountant reports capital asset depreciation expense in the statement of profit and loss, also referred to as statement of income. Accumulated depreciation is a balance sheet item. A balance sheet is also called a statement of financial position or statement of financial condition.

References

• Investopedia: Depreciation
• Investopedia: Depreciation: Straight-Line Vs. Double-Declining Methods