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Straight Line Depreciation -- an equal depreciation amount each year;
2. Units of Activity-- depreciation is based on asset's productivity rather than time passage;
3. Declining Balance -- an accelerated method which uses a fixed percentage of the asset's declining book value each year.
An asset may need to be replaced, bought or sold when it has outlived its useful life. For example, this can occur with trucks used in transporting goods and services. Overtime, their useful life depreciates. As such they will need to be traded in, or sold for cash to purchase new trucks.
What are the options for accounting for these dispositions?
In regards to accounting, irrespective if the firm sells the asset, trades the asset in, or discards it altogether, they will need to follow the ensuing steps.
1. Record the additional depreciation in the general journal. Update the plant asset record. Depreciation expense is recorded on a plant asset record at the end of a fiscal period. When discarding, selling, or trading an asset, the depreciation must be recorded year-to-date. If less...
Record the disposal in one of these journals -- discard, General Journal; sale, Cash Receipts; trade, Cash Payments.
Remove Accumulated Depreciation as debit
Remove original cost from plant asset account as credit
Record cash if any cash transaction if any such transaction occurred
Record gain or loss on sell of item, if the item was sold at all
Record new asset if a trade occurred
3. Update plant asset record
In conclusion, accounting, particular for plant assets is relatively straightforward. Assets generally have a useful life as determined by management. Through proper accounting, management can quickly identify when and why to sell old or obsolete plant equipment. When doing so, the business can potentially perform better a new and much more efficient machinery enters the business.
References:
1) Kaplan, Robert S. And Bruns, W. Accounting and Management: A Field Study Perspective (Harvard Business School Press, 1987) ISBN 0-87584-186-4
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