Accounts: Their Construction and Interpretation for Business Men and Students of Affairs

By William Morse Cole | Go to book overview

CHAPTER EIGHT
THE GENERAL PRINCIPLES OF DEPRECIATION

THE last illustration in the preceding chapter showed that in treating depreciation one is concerned not chiefly with a choice between different accounts when an entry is originally made, but with the length of time the value shall remain charged to capital account. Allowing for depreciation is usually called, in technical terms, "writing off." The expression means simply that the valuation formerly on the books is displaced by a new and smaller valuation. This expression is used whether the change is made by simply revaluing the original account by the method shown in Chapter V, page 47, or through a depreciation account, as shown in Appendix B, II.

The converse of "writing off " is "writing up." This expression means simply that the valuation set upon the property has been increased and is carried forward as a new valuation. It is hardly likely to be done through the medium of another account, unless one wishes to open an account called "Appreciation," and it is, therefore, managed simply by bringing down a new valuation, as shown in Chapter V.

We have already considered the principle of depreciation as shown in its simplest type, and we must now see some of the particular forms in which it may appear. The method of handling it will depend upon the circumstances under which it occurs. There are three main policies of treating depreciation, and one or more of these three is adapted to every conceivable case. The three policies are these: first, allowing the property to wear out or go to decay without replacement, on the theory that no use will ever again be had for its like; second, keeping the property up to the original standard by frequent repairs and replacements but without special provision for future replacements; third, allowing depreciation to continue to a certain point and accumulating, in the mean time, special funds to be available for replacement at whatever time it shall become

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