COOPERATIVE ORGANIZATION BUSINESS 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 precision is made for depreciation of assets. Re- 
gardless of repairs, ordinary 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 amount 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 }^ear 
to another should be on the same equitable basis. The simplest 
method of computing the annual rate at which depreciation mnj be 
charged off 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 years, 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, therefore this is the method generally adopted. 
For 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 machinery " account. The following entry is made in the 
journal: 
& 
Profit and loss $500 
Reserve for depreciation on machinery .$500 
This transfers $500 of the profits to be used in replacing the ma- 
chinery. 
On the balance sheet, however, " reserve for depreciation on ma- 
chinery " should be deducted from the original cost of the ma- 
chinery, instead of showing the machinery as an asset of $5,000 and 
the depreciation as a liability of $500. 
