In accounting terms, what is depreciation expense is determined by comparing the total amount of the expenses incurred to the replacement cost. The expenses that are written-off are those that are credited to the current balance of the business. The business’ cost of doing business is also called its gross cost.
There are two different methods to determine the expense of the capital assets of a business. These are the amortization method and the cost method. In the amortization method, the business is given an amortization table, which states how much of the capital assets will be replaced over time. The cost method uses the amount of revenue earned to calculate the depreciated value of the business’s capital assets. Both of these methods are very important when determining what is depreciation expense in accounting.
There are many factors that determine how much to credit or debit for depreciation. One of these is the age of the asset. Assets that have been used more often are subject to greater depreciation. Age is also related to the level of activity that took place with the asset, as well as whether there has been a major repair or modifications made to the item.
Another important factor to determine what is depreciation expense in accounting is the amount of time that it will take to recoup the depreciated value of the asset. Assets that are used over a long period of time may take longer to depreciate. One of the reasons for this is that products and services that are used frequently are not readily replaceable. Assets that are not easily replaceable add to the inventory of a company. They are also a reflection on the level of service that a business provides to customers.
The final item that must be determined when what is depreciation expense in accounting is the replacement cost basis. This includes the market price, less any depreciated value, less any repair cost and all expenses that must be incurred to replace the item. The amount of this cost basis that is deducted is based on the sales price of the item, less any markup that might be added to the retail price. This includes the amount that would be paid for brand new products in today’s marketplace.
Many small businesses choose to deduct a reasonable amount from their gross revenue in order to reduce what is depreciation expense in accounting. For example, they may elect to deduct the cost of good sold or the cost of the merchant account. They could also deduct the cost basis for certain purchases, such as software and other electronic products.
When what is depreciation expense in accounting is calculated by subtracting the market price from the depreciated value, the actual dollar amount that is paid for an item is found. The business owner should be aware, however, that it will not always reflect the total cost of ownership because some costs are depreciated over time while others are only depreciated during a particular year. Additionally, these items are reported on the balance sheet and reported on the income statement as property, inventory and equipment.
Whether or not what is depreciation expense in accounting is an accurate or helpful measure of depreciation in the current marketplace is determined by a number of factors. Each of these factors is determined by how the business operates. While what is depreciation expense in accounting may be helpful in determining whether or not certain costs are depreciated over time, it is not a crystal ball as far as predicting what the market will do in the future. It is, however, a necessary piece of information for businesses to use in their decision making process.