A company purchased machinery on January 2, Year 1, for $980,000. A five-year life was estimated and no residual value was anticipated. The company decided to use the straight-line depreciation method and recorded $196,000 in depreciation in Year 1 and Year 2. Early in Year 3, the company changed its depreciation method to the sum-of-the-years'-digits (SYD) method.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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