COOPEEATIVE OEGA]SriZATIO]Sr BUSIIS^ESS METHODS. 13 



RESERVE FOR DEPRECIATION. 



The generally accepted definition of a reserve is an amount set 

 aside for a special purpose, such as a " reserve for depreciation.'*' By 

 depreciation is meant the ordinary wear and tear which occurs to 

 assets used in any enterprise. 



The true condition of an organization is not shown accurately upon 

 the books unless provision is made for depreciation of assets. Re- 

 gardless of repairs, ordinaiy wear and tear will occur and must be 

 provided for by depreciation. The wear and tear of an asset is just 

 as much a part of the cost of doing business as the cost of labor. 



The extent of depreciation should be estimated as closely as pos- 

 sible and credited to a "reserve for depreciation " account at the time 

 the books are closed for the year. This will decrease the net profit 

 by the amou.nt of depreciation, and set aside amounts to replace the 

 assets out of the earnings. Supplies carried over are just as subject 

 to depreciation as' any fixed asset. 



To provide properly for depreciation, " reserve for depreciation ■' 

 account should be credited and '' profit and loss "' debited with the 

 proper amount. The apportionment of this amount from one year 

 to another should be on the same equitable basis. The simplest 

 method of computing the annual rate at which depreciation may be 

 charged oiF is on a fixed percentage of the original value, which 

 would spread the depreciation equally over the life of the asset. A 

 better method however, and one in which the apportionment of this 

 amount from one year to another is made on a more equitable basis 

 is by computing the depreciation on a basis of a fixed percentage on 

 the diminishing value. This makes the charge heavier in the earlier 

 years, the amount being reduced gradually from year to year. The 

 cost of repairs is greater in later j^ears, and by charging off a fixed 

 percentage the cost of operating is equalized. This method also 

 leaves a small residual value, since the entire cost can never be fully 

 taken up, tlicreforc this is the method generally adopted. 



P"or example : Suppose an organization has machinery for which 

 its books show it paid $5,000. It is decided to carry 10 per cent of 

 the remaining balance of this account to a "reserve for depreciation 

 on niMcbinory *' account. Th(* following entry is made in the 

 joiiin il : 



I'ruflt and ]ohh $noo 



Uf'scrve for <lor»rocl!itioii on machinery it^nod 



This transfers $500 of tlic })ro(its to be used in icpliicinii' the ma- 

 rl lineiy. 



On tin; baliince siicct, liowcner, " lesei've for depreciation on ma- 

 chinery'' should b(' deducted from the original cost of the nia- 

 cliinery, instead of showing the nuu-hineiy as an asset of $5,000 and 

 the dc|>r-cf;iiition sis ;i linhility of $500. 



