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Expense Recognition: Depreciation and Amortization

Reasonable and necessary business expenditures that are not completely deductible in the year incurred will be either

(1) depreciated,
(2) amortized, or
(3) capitalized.

Pick two of these methods for recognizing expenses. Briefly define it and provide a brief example of an expenditure it applies to.

Solution Preview

Hello Student,

Let me start by saying that whenever most companies acquire fixed assets for use in their business, you may find that these assets have a life span which is longer than one year and hence it is more suitable for the company to spread or allocate the costs of owning that particular asset over the time period it will be held rather than expensing the total cost of the asset at the time of acquisition. Note the following excerpt:

"Depreciation is the process by which a company gradually records the loss in value of a fixed asset. The purpose of recording depreciation as an expense over a period is to spread the initial purchase price of the fixed asset over its useful ...

Solution Summary

This solution provides information related to amotization and depreciation and gives examples as it relates to each.