Allocation of Depreciation

A company depreciates equipment that it uses in operating activities.

A firm's senior leadership implements depreciation and depreciation allocation procedures to ensure that financial reports are accurate and in line with accounting rules. These rules include Securities and Exchange Commission regulations and international financial reporting standards.

Depreciation Defined

Depreciation is a business method in which a company allocates the cost of a fixed asset over a defined number of periods, also known as the asset's useful life. An asset's useful life is the number of years a company believes it can use the asset in operating activities.

Depreciation Allocation Defined

Depreciation allocation is an accounting practice in which a company matches corporate revenues with expenses that it incurs in maintaining or upgrading fixed assets. For example, a company may upgrade machinery at the beginning of the year and allocate the machinery's depreciation as an expense in the income statement.

Accounting and Reporting

To record depreciation expense, an accountant debits the depreciation expense account and credits the accumulated depreciation account. Depreciation expense is an income statement item. Accumulated depreciation is a balance sheet component. An income statement is also known as a statement of profit and loss.

References

• Investopedia: Depreciation: Straight-Line vs. Double-Declining Methods
• Investopedia: Depreciation
• University of Colorado at Boulder: Acquisition and Disposition of Property, Plant and Equipment
• Venture Line: Depreciation Allocation Definition