What Is the Process of Depreciation?

Introduction

The statement that depreciation is a process of allocation and not valuation is quite interesting and asserts a point of view that coincides with a specific type of depreciation. The definition of allocation as well as valuation in their specific form is also of importance to distinguish the difference. For example, straight-line depreciation is a cost allocation methodology that breaks the cost of an asset down into specific periods that does not establish any particular metric for valuation. Therefore, depreciation as process of allocation is a form of depreciating an asset that is indifferent to the underlying valuation with concern to the particular use of the asset and the specific period the asset is used. Valuation will take into consideration the accelerated depreciation methodology that considers an asset as depreciating at a faster rate early in the useful cycle of the asset and slowing down to zero value with regard to depreciation of the asset as the asset approaches salvage value.

The meaning one attaches to depreciation is respective to the viewpoint one will have with regard to whether depreciation is a process of allocation or a process of valuation. According to the ‘Accounting Review’, “”Depreciation” says one writer “means the consumption in production processes of a preliminary outlay in such [fixed tangible] assets as make production possible” but in the same article he says” “depreciation is to maintain the capital intact.” (Hatfield, 20, 1936) The older definition of depreciation is used as a means to assign what may be considered an ‘original’ or old economy meaning for depreciation that registers as accurate to businessman of earlier periods. The writer has purported a definition of depreciation that is specific to preserving capital in the form of an asset and is also specific to defining how to price ‘consumption’ by an asset during its useful production processes cycle.

I believe the statement of depreciation is a process of allocation and not valuation is stated with intent to mean that depreciation is a continuous and balanced process of an asset life cycle and until salvage. Therefore, the statement is intended to define the methodology of depreciation and detail how to depreciate an asset with respect to the underlying physical assets of a business.

References

Hatfield, HR 1936, ‘WHAT THEY SAY ABOUT DEPRECIATION’, Accounting Review, 11, 1, p. 18, Business Source Alumni Edition, EBSCOhost, viewed 5 December 2013.