term Depreciation usually used for tangible assets and Amortization usually used for intangible assets
There are two main ways to calculate depreciation - straight line and reducing balance. Second usually used for motor vehicles and other assets which depreciate heavily during first years of use.
Depreciation charge has nothing to do with maintenance or expenditure costs - these are separate costs.
for a straight line you take purchase price less residual value and divide by the number of years you plan to use your asset. This will give you annual depreciation charge which goes to your P&L together with other cost. Journal entry will be:
Dr. P&L depreciation charge
Cr. B/S Accumulated depreciation
Your example of the computer depreciation could need one adjustment.
There's typically a "salvage value," or lowest value of an item where it can still be sold for parts or so forth.
I would adjust depreciation and retain some sort of realistic value at the end of the period.
And think of it this way, typically equipment depreciates and a loan amortizes. (same concept mentioned by baboon with tangible vs intangible)
Hello,
Im looking at owners's earnings and im just bit confused.
owners earnings = net income + amortization and depreciation minus capital expenditure
ok how is amortization and depreciation is added? shouldnt it be minused since they are costs for the equipment or patent? if im correct its like say a computer is 300 dollars and can last 5 years then the corect of it is spread over 5 years so it would be 60 dollars?
so shouldnt 60 dollars be taken away since that would be a maintence or expenditure cost?
thnks
