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Figure 3-19: Asset acquisition with a clearing account

Demo 3.8: Acquire an asset

Depreciation

The second transaction type is depreciation. Over time, an asset’s value dimin-
ishes due to wear and tear. This decrease in value is recorded as depreciation.
Thus, the value of an asset is equal to its acquisition value less accumulated
depreciation. Depreciation can be ordinary or unplanned. Ordinary depreciation
refers to the planned, periodic, and recurring decrease in the value of an asset due
to normal usage. In contrast, unplanned depreciation occurs when extraordinary
or unforeseen circumstances cause the asset to lose value faster than normal.
The actual amount of asset depreciation depends on several factors, pri-
marily the type of depreciation method the company employs, the asset’s useful
life, and its residual value. Companies can select from a variety of depreciation
methods, for example, straight-line and double-declining balance. In straight-
line depreciation, the asset is depreciated by the same amount every year. In
declining balance, the asset is depreciated at a fi xed percentage rate each year.
In contrast to the straight-line method, then, in this method the amount of the
depreciation decreases each year because the value of the asset decreases each
year.
Going further, every asset has a useful life, which specifi es how long the
company anticipates using the asset. At the end of its useful life, an asset has
a scrap or residual value. This is the amount the company expects to receive
when it disposes of the asset. Finally, an asset has a book value, which is the
value of the asset after it is depreciated.
In the previous section we presented an example in which a company
purchases a desktop computer. Let’s use this same example to illustrate
depreciation. We will assume that the asset was purchased at the beginning of
the year, has a useful life of four years, and a residual value of $1,000. Using
the straight-line depreciation method, the amount to be depreciated is the

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