Economics

• Depreciation - is the reduction or fall in the value of an asset or physical property during the course of its working life and due to the passage of time.
• Physical depreciation - is due to the reduction of the physical ability of an equipment or asset to produce results
• Functional depreciation - is due to the reduction in the demand for the function that the equipment or asset was designed to render. This type of depreciation is often called obsolescence.
• Basis or Cost Basis - It is the initial cost of acquiring an asset, (purchase price plus taxes). It is also termed as unadjusted cost basis or first cost
• Adjusted (cost) Basis - The original cost basis of the asset, adjusted by allowable increases or decreases

  • is used to compute depreciation deductions.
• Book Value (BV)

  • It is the original cost basis of the property, including any adjustments, less all allowable depreciation deductions.
• Market Value (MV)

  • It is the amount that will be paid by a willing buyer to a willing seller of a property , where each has equal advantage and is under no compulsion to buy or sell.
• Recovery period

  • It is the number of years over which the basis of a property is recovered through the accounting process.
• Salvage Value (SV)

  • The estimated value of a property at the end of its useful life.
• Useful life - The expected period that the property will be used in a trade or business to produce income.
• Straight Line Method - simplest depreciation method, assumes that constant amount is depreciated each year
• declining balance method - sometimes called constant percentange method or the matheson formula
• Declining Balance Method with Switchover to SL Method - Because the DB method never reaches a BV of zero, it is permissible to switch from this method to the SL Method so that an asset’s BVN will be zero, or some other amount such as SVN.
• Sinking fund Method - it is assumed that sinking fund is established in which funds will accumulate for replacement purposes