Opinion ID: 774577
Heading Depth: 3
Heading Rank: 1

Heading: Depreciation Accounting

Text: 12 The basic purpose of depreciation is to spread the cost of a capital asset over the accounting periods that benefit from the asset's use. Kermit D. Larson and Paul B.W. Miller, Fundamental Accounting Principles 532 (13th ed. 1993). Without the benefit of hindsight, the beneficial period of an asset's use, i.e., useful life, is necessarily an estimate, and it is usually not the same as actual life. Id. at 533. This estimate takes into account the decrease in the service potential of the asset resulting from such causes as physical wear and tear through ordinary use, as well as obsolescence caused by technological changes and the introduction of new and better machinery and methods of production. Id. 13 Although this type of cost-spreading is an estimate, under GAAP it is nevertheless supposed to be systematic and rational. Id.; Glenn L. Johnson and James A. Gentry, Finney and Miller's Principles of Accounting 287 (8th ed. 1980). A variety of generally accepted methods for allocating depreciation expenses of an asset exist, such as straight line, units of production, sum-of-the-years-digits, and double declining balance 1 . Id.; Johnson at 287. While GAAP requires the method chosen to be a reasonable reflection of the use of the asset, any method chosen is going to be artificial because depreciation is an allocation process as opposed to a valuation process. Id.; Johnson at 287.