The first three causes of depreciation apply to physical assets, the fourth to both tangible and in tangible—a patent right usually becomes obsolete be fore the expiration of seventeen years because a bet ter patented article supersedes the old one—the fifth cause applies to intangible assets.
10. Methods of treating depreciation in the ac counts.—The charge for depreciation may be debited to a general depreciation account or to some class depreciation account, as "depreciation of buildings," "depreciation of machinery or to a specific deprecia tion account as "depreciation of machine A." Specific depreciation accounts lend themselves most readily to functional classification of costs.
The corresponding credit might go to an account with the depreciable assets—the depreciation of a cer tain machine, for instance, might go to the machinery account, or to the account with a specific machine. This is not regarded as good practice, because (1) it would mix credits for depreciation allowances with credits for sales of such equipment ; (2) the allowances are only estimates, and to credit them to the asset ac counts may prejudice later valuations in case of dis putes ; (3) in balancing accounts from time to time, the allowances made are lost sight of; (4) the total allowance to date, being scattered thru other accounts, does not show in the account. It is therefore con sidered preferable to carry the credit to a separate re serve account which serves as an offset to the relevant asset account.
The amount allowed for depreciation, as already stated, may be credited to a general depreciation re serve account; to a class reserve account, as "re serve for the depreciation of buildings," "reserve for the depreciation of machinery," and so on ; or to a de preciation reserve account for the specific asset. If a detailed ledger is operated in which there are accounts for each class of depreciable assets, or an account with each individual asset, the allowances for the various classes or individual assets may be entered in a spe cial column provided for them.
11. Advantage of class depreciation reserve ac counts.—The advantage of having such class depre ciation reserve accounts is, that in preparing a balance sheet such accounts can be deducted directly from the relevant asset accounts to obtain for the latter their balance sheet valuation. The advantage of the spe
cific depreciation record is, that when an instrument is scrapped, its cost less its scrap value can be compared with the allowance made for its depreciation to see whether the latter has been adequate, and thus a basis may be obtained for future depreciation rates on the same classes of equipment.
12. Treatment in the accounts at the time of scrap ping an asset.—When the service life of a machine is ended, it ceases to be a machine and becomes mere scrap material. The correct procedure theoretically is to estimate its scrap value and make the following entries Debit scrap material; Debit reserve for depreciation of machinery Credit machinery (at original cost) If the total reserve made for depreciation of this machine was more than sufficient, or less so, another entry would be made charging or crediting surplus or profits for the discrepancy.
13. Relation of repairs to depreciation.—In dis cussing depreciation the effect of repairs has been ignored. Practically, a machine does not, like the Deacon's one-horse shay, fail iri all its parts simultane ously. Certain parts wear out much more rapidly than others, but any part may be replaced, and the machine will continue to render service. There are two views about the effect of such repairs upon the service life of the machine. Some assert that notwith standing these part replacements, physical deteriora tion goes on within the machine as a whole until its operating efficiency is so low that the whole machine has to be discarded and a new one substituted. It is difficult to see why this should be true in these times of standardized, interchangeable parts, yet it may hold with some kinds of appliances.
14. Another view of replacements.—The other view is that replacement of parts prolongs the serv ice life of the machine at full efficiency indefinitely.
Nevertheless, it must be admitted that obsolescence and inadequacy will eventually send such instruments to the scrap heap.