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Accounting Demystified by Jeffry R. Haber

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Depreciation

When a company buys a building or a piece of equipment, the cost is capitalized, or set up in an asset account. One of the principles of accounting is matching revenue with expense. If we own a building that is rented out as a store and offices, then it is involved in the production of revenue. How do we match the cost of the building to the revenue? A common denominator among all fixed assets is that they last longer than one year, and therefore they participate in generating many years' revenue. That is where the concept of depreciation comes in— taking the cost of an asset and spreading it over the years that will benefit from having the asset.

There are two common methods for depreciating an asset, straight-line and declining-balance. ...

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