Financial Accounting and Reporting/Cost Allocation

Definition
Depreciation is the systematic allocation of the cost of an asset over its useful life. Depreciation is treated as an expense for the period incurred, and is accumulated for the whole useful life of an asset as a contra-account to a specific PPE account. The proforma entry is:

Basic Formula
Depreciation expense is calculated based on the depreciable amount (D) and not on the actual cost of the asset, i.e.,$$ Dep. exp. = f(D) $$, where D is the difference between the Original Cost (C) and the Scrap Value (S) or $$ D=C-S$$.

Straight-line method
The straight-line method is based on the following assumptions;
 * 1) The asset wastage is a function of time and independent of usage, i.e., $$Dep. exp = f(D,t)$$
 * 2) The wastage is constant or linear.

Consider the following illustration: ABC Co. has a $30,000 threshold for capitalization of assets. As a policy, any asset acquired for less than $30,000 are expensed immediately. The company reported the following purchases related to PPE for the year: Prior to this, the company reported the following amounts in their previous year's financial statements;