IV. Accounting for Depreciation a. Fixed assets, excluding land, decrease in usefulness over time i. Must record a portion of the asset's cost as an expense over its useful life (Depreciation Expense) b. Depreciation is caused by i. Physical factors (wear and tear) ii. Functional factors (become obsolete) c. Depreciation does NOT measure the market value of the asset i. Cost Allocation, not Asset Valuation 1. Book Value of an Asset a. Cost - Accumulated Depreciation d. Depreciation does NOT provide cash to replace fixed assets as they are removed from service. V. Calculating Depreciation a. Cost - the cost of the asset b. Useful Life length of time the asset is expected to be used in normal operations c. Salvage Value (Residual Value) - estimated value at the end of the asset's useful life i. Depreciable Cost: Asset's Cost - Salvage Value 1. The amount that will be allocated to expense (Depreciation Expense) over the asset's useful life