About Me
CPA
1 Regulation (REG)
1.1 Ethics, Professional Responsibilities, and Federal Tax Procedures
1.1 1 Professional ethics and responsibilities
1.1 2 Federal tax procedures and practices
1.1 3 Circular 230
1.2 Business Law
1.2 1 Legal rights, duties, and liabilities of entities
1.2 2 Contracts and sales
1.2 3 Property and bailments
1.2 4 Agency and employment
1.2 5 Business organizations
1.2 6 Bankruptcy
1.2 7 Secured transactions
1.3 Federal Taxation of Property Transactions
1.3 1 Basis determination and adjustments
1.3 2 Gains and losses from property transactions
1.3 3 Like-kind exchanges
1.3 4 Depreciation, amortization, and depletion
1.3 5 Installment sales
1.3 6 Capital gains and losses
1.3 7 Nontaxable exchanges
1.4 Federal Taxation of Individuals
1.4 1 Gross income inclusions and exclusions
1.4 2 Adjustments to income
1.4 3 Itemized deductions and standard deduction
1.4 4 Personal and dependency exemptions
1.4 5 Tax credits
1.4 6 Taxation of individuals with multiple jobs
1.4 7 Taxation of nonresident aliens
1.4 8 Alternative minimum tax
1.5 Federal Taxation of Entities
1.5 1 Taxation of C corporations
1.5 2 Taxation of S corporations
1.5 3 Taxation of partnerships
1.5 4 Taxation of trusts and estates
1.5 5 Taxation of international transactions
2 Financial Accounting and Reporting (FAR)
2.1 Conceptual Framework, Standard-Setting, and Financial Reporting
2.1 1 Financial reporting framework
2.1 2 Financial statement elements
2.1 3 Financial statement presentation
2.1 4 Accounting standards and standard-setting
2.2 Select Financial Statement Accounts
2.2 1 Revenue recognition
2.2 2 Inventory
2.2 3 Property, plant, and equipment
2.2 4 Intangible assets
2.2 5 Liabilities
2.2 6 Equity
2.2 7 Compensation and benefits
2.3 Specific Transactions, Events, and Disclosures
2.3 1 Leases
2.3 2 Income taxes
2.3 3 Pensions and other post-retirement benefits
2.3 4 Derivatives and hedging
2.3 5 Business combinations and consolidations
2.3 6 Foreign currency transactions and translations
2.3 7 Interim financial reporting
2.4 Governmental Accounting and Not-for-Profit Accounting
2.4 1 Governmental accounting principles
2.4 2 Governmental financial statements
2.4 3 Not-for-profit accounting principles
2.4 4 Not-for-profit financial statements
3 Auditing and Attestation (AUD)
3.1 Engagement Planning and Risk Assessment
3.1 1 Engagement acceptance and continuance
3.1 2 Understanding the entity and its environment
3.1 3 Risk assessment procedures
3.1 4 Internal control
3.2 Performing Audit Procedures and Evaluating Evidence
3.2 1 Audit evidence
3.2 2 Audit procedures
3.2 3 Analytical procedures
3.2 4 Substantive tests of transactions
3.2 5 Tests of details of balances
3.3 Reporting on Financial Statements
3.3 1 Audit report content
3.3 2 Types of audit reports
3.3 3 Other information in documents containing audited financial statements
3.4 Other Attestation and Assurance Engagements
3.4 1 Types of attestation engagements
3.4 2 Standards for attestation engagements
3.4 3 Reporting on attestation engagements
4 Business Environment and Concepts (BEC)
4.1 Corporate Governance
4.1 1 Internal controls and risk assessment
4.1 2 Code of conduct and ethics
4.1 3 Corporate governance frameworks
4.2 Economic Concepts
4.2 1 Microeconomics
4.2 2 Macroeconomics
4.2 3 Financial risk management
4.3 Financial Management
4.3 1 Capital budgeting
4.3 2 Cost measurement and allocation
4.3 3 Working capital management
4.3 4 Financial statement analysis
4.4 Information Technology
4.4 1 IT controls and security
4.4 2 Data analytics
4.4 3 Enterprise resource planning (ERP) systems
4.5 Operations Management
4.5 1 Strategic planning
4.5 2 Project management
4.5 3 Quality management
4.5 4 Supply chain management
1 3 4 Depreciation, Amortization, and Depletion Explained

3 4 Depreciation, Amortization, and Depletion Explained

Key Concepts

Depreciation

Depreciation is the systematic allocation of the cost of tangible assets over their useful lives. It reflects the wear and tear, decay, or obsolescence of the asset. Depreciation is typically calculated using methods such as straight-line, declining balance, or units of production.

Example: A company purchases a delivery truck for $50,000 with an estimated useful life of 10 years and a salvage value of $5,000. Using the straight-line method, the annual depreciation expense is calculated as ($50,000 - $5,000) / 10 = $4,500 per year.

Amortization

Amortization is the systematic allocation of the cost of intangible assets over their useful lives. It accounts for the gradual consumption or reduction in value of intangible assets such as patents, trademarks, and goodwill. Amortization is also used to spread the cost of a bond or loan over its term.

Example: A company acquires a patent for $100,000 with a useful life of 20 years. The annual amortization expense is calculated as $100,000 / 20 = $5,000 per year.

Depletion

Depletion is the systematic allocation of the cost of natural resources, such as minerals, oil, or timber, over the period during which the resources are extracted. It reflects the exhaustion of the resource and is typically calculated based on the units extracted.

Example: A mining company purchases a mineral deposit for $1,000,000 and estimates that it contains 500,000 tons of ore. In the first year, the company extracts 50,000 tons. The depletion expense for the first year is calculated as (50,000 / 500,000) * $1,000,000 = $100,000.

Examples and Analogies

Consider depreciation as the "mileage" on a vehicle, where the value decreases over time due to use and age. Amortization can be likened to the "depreciation" of intellectual property, where the value of an idea or brand diminishes over its useful life. Depletion is akin to the "extraction" of natural resources, where the value of the resource decreases as it is mined or harvested.

Conclusion

Understanding depreciation, amortization, and depletion is crucial for CPAs to accurately reflect the consumption of assets in financial statements. By mastering these concepts, CPAs can provide valuable insights into the financial health and performance of a business.

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