Splish Company constructed a building at a cost of $2,728,000 and occupied it beginning in January 2006. It was estimated at that time that its life would be 40 years, with no salvage value. In January 2026, a new roof was installed at a cost of $372,000, and it was estimated then that the building would have a useful life of 25 years from that date. The cost of the old roof was $198,400.

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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.