What is Depreciation Cost?
Depreciation cost is a term used to account for the loss of value in an item over time. There are four methods of depreciation that are approved for use under the generally accepted accounting principles or GAAP. The most commonly used methods are straight-line depreciation, declining balance and percentage of use. The depreciation cost must be listed as a separate item on the company’s financial statements. The method of calculation will provided in the notes to the financial statement. If the method used is changed, this must be clearly noted in the notes, as it has a significant impact on the financial statements. There are two costs for a fixed asset: purchase price or book value and the adjusted or depreciated cost. The purchase price is the amount of the original equipment cost. This is used as the dollar value of the equipment. However, it is necessary to adjust this value to indicate the amount that could actually be realized if the equipment was to be sold. This is the depreci
Depreciation cost means a reduction in value. The diagram shows it is a normal farm cost, like the cost of labor and farm imputs (Fig. 1). Why is it included as a farm expense, even though it is not paid every year? This is because the value of farm machinery is partly used up every year until the end of its life. Let us take a simple example. A farmer operates his farm with 5,000 US dollars of his own capital at the beginning of the year 2000. He uses this amount to purchase fertilizer, pesticides and the oil for his farm tractor. These cost 2,000 US dollars, 2,500 US dollars and 500 US dollars, respectively. He owns his farm tractor, which he bought one year previously, in1999. In this case, how much are the farm expenses during the year 2000? It is very easy for the farmer to think of them as only 5,000 US dollars, because only the fertilizer, pesticides and oil were consumed completely, while on the other hand he still has his farm tractor. But the real farm expenses are more than
