SPECIAL ACCOUNTS AND ENTRIES 155 



4 



years of a machine's life. 1 Under this plan, it is considered 

 that new equipment is purchased from time to time before 

 all of the old equipment becomes absolutely valueless. This 

 fact tends to equalize the depreciation from year to year, 

 while allowing for a conservative life of the various units 

 of equipment. 



Building Depreciation. The general principles govern- 

 ing the calculation of depreciation on equipment apply in 

 the case of depreciation on buildings. A rate of 5% on the 

 diminishing value is conservative for the average farm 

 buildings. The annual entry for building depreciation is a 

 debit to Building Expense account and a credit to Buildings. 



General Theory of Depreciation. Other methods of cal- 

 culating depreciation are not considered practical enough 

 for farm use, hence are not discussed here. 



An account called Reserve for Depreciation is used in 

 commercial accounting to which is credited the deprecia- 

 tion instead of crediting (decreasing) the property account 

 direct. The Statement of Resources and Liabilities is then 

 prepared in such a way as to show the resulting value of 

 the properties exactly as is shown in the ledger accounts 

 under the method presented herein. 



Likewise, it is not considered necessary to discuss why 

 depreciation is an element of expense. Not many years 

 ago accountants had great difficulty in impressing upon 

 judges, lawyers and business men in general the fact that 

 depreciation was an expense. At present, however, the 

 business world is generally coming to recognize the fact 

 that a deterioration of capital requires an entry on the 

 books in order to show the true conditions. It has been 

 pointed out in earlier chapters herein, that a decrease in 

 capital requires a debit to Loss and Gain or some other 

 nominal account, which is really a subdivision of the Cap- 

 ital account itself. 



1 Bulletin 145 Minnesota Agricultural Experiment Station, pp. 24-25. 



