A crude oil processing plant costs RO 12,000. The residual value of the processing plant is RO 2000. The estimated capacity to process crude oil is 50,000 barrels of oil during its entire life. The production for the first year is 2000 barrels of crude oil. The depreciation for the first year by using units of production method is:
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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