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The usefulness of most assets, other than land, declines over time and some type of write-down or write-off of cost is needed to indicate that the usefulness of an asset has declined. Depreciation is the term most often used to indicate that tangible assets have declined in service potential. Where natural resources, such as oil, natural gas, timber and coal are involved, the term depletion is used.

Depreciation of Fund Fixed Assets

An entity purchased a truck to be used in the sewer operation which is accounted for as an enterprise fund. The cost of the truck was $10,000, its estimated useful life is four years and its salvage value is estimated at $1,000. The truck was purchased on January 1, l988. On December 31, 1988, the depreciation expense is calculated in the following manner:

Depreciation Expense
 
Depreciation Expense = (Cost - Salvage value) / Estimated useful life 
 
                     =  (10,000 - 1,000) / 4 
                     =  $2,250 

The book value of an asset is the original cost minus accumulated depreciation. At December 31, 1988, the truck's book value is $7,750.

This method of calculating depreciation is called straight line. Depreciation expense is the same for each year of the estimated useful life. Accelerated methods of depreciation such as sum of the year's digits or declining balance may also be used when appropriate.

Depreciation of General Fixed Assets

When general fixed assets are depreciated, no depreciation expense is reported. Rather, a reduction in the "Investment in General Fixed Assets" account is recorded. Reporting depreciation for general fixed assets is not required but is permitted.

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