Financial Accounting For Dummies

Chapter 12

Examining Depreciation Cost Flow Assumptions

In This Chapter

Seeing how depreciation affects the financial statements

Knowing the ins and outs of costs

Calculating depreciation

Looking at a schedule of depreciation

This chapter is your introduction to a company’s tangible assets, which you can touch and feel — they have a physical presence. Tangible assets, also called fixed assets, include property, plant, and equipment (PP&E). Many fixed assets are used for years, and a company relies on a mysterious accounting tool called depreciation to keep its financial statements in line with the reality of how long those assets stay in use.

If you read this entire chapter, depreciation won’t seem so mysterious anymore. I help you understand what depreciation is, how it affects all three financial statements, and how it connects a business’s costs to its expenses. (Yes, costs and expenses are two different things in the business world.) I also show the various depreciation methods financial accountants use: the straight-line, declining balance, sum-of-the-years’-digits, and units-of-production ...