Financial Education

With the exception of land, which is deemed to have an indefinite useful life, it is assumed that property, plant, and equipment will be consumed over time. The cost of property, plant, and equipment must be systematically depreciated as the asset ages. The balance sheet reflects both the historical cost of an asset and its related account, accumulated depreciation, with the difference between those two amounts called the net book value of the asset.

Different depreciation methods will provide different measures, thereby influencing the amounts on the balance sheet. Thus, a company applying accelerated depreciation methods will have lower net book values for its assets than one applying straight-line methods to similar sets of assets. In addition, as long as an asset is in use, its historical cost and accumulated depreciation will remain on the balance sheet. This remains the case even if the asset has been depreciated down to salvage value or to zero. As a result, it is possible to have productive assets carried on the balance sheet at very low net amounts when reporting under the historical cost assumption.

For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis

See also:

Straight Line Depreciation

Estimating the Average Age of a Company’s Assets

Determining the Average Useful Life of Assets

Estimating the Average Remaining Useful Life of a Company’s Assets

What is Depreciation and Amortization Expense?