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Recognizing Differences Essay

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The following information will discuss the difference between valuation, depreciation, amortization and depletion. It will also discuss is it appropriate to calculate depreciation using two different methods? What is valuation? “The process of determining the current worth of an asset or company” (www.investopedia.com). For example if you bought a car a year ago the value of the car will go down. The reason the value goes down is because you have wear and tear on the car so it is not worth as much, so the valuation is looking at the asset (the vehicle) and figuring out how much it is worth after being used. What is Depreciation? “A method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes” (www.investopedia.com). The three classes used for depreciation is land improvements, buildings and equipment. If a piece of equipment is bought by a company for two million dollars and the company expects it to be used for 10 years, it will be depreciated over 10 years. This means that every accounting year the company would expense $200,000.00 (assuming the company uses straight-line depreciation).

What is Amortization? “The paying off of debit in regular installments over a period of time” (www.investopedia.com). Amortization is the allocation of only intangible assets, such as copyrights or patents. For example if a company buys a piece of equipment for $45 million dollars and the patent for this equipment is 15 years, this means that $3 million would be recorded as an amortization expense each year. What is depletion? “An accrual accounting method that companies use to allocate the cost of extracting natural resources such as timber, minerals and oil from the earth” (www.investopedia.com). There are two types of depletion; percentage depletion and cost depletion. When a company is depleting timber the IRS required that the cost method is used. The IRS then required the method that yields the highest deduction to be used for mineral property, and oil from the earth. Yes, it is appropriate to calculate depreciation using two different methods. Companies use the straight-line method on its financial statements for their plant assets. Companies can then use the accelerated method on their income tax return. A company can also be depreciating their equipment for ten years for their financial statements and for their income tax return they can use seven years.

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Investopedia (2014): Retrieved March 24, 2014
Investopedia (2014): Retrieved March 24, 2014
Investopedia (2014): Retrieved March 24, 2014
Investopedia (2014): Retrieved March 24, 2014

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