Checkpoint: Recognizing Differences

Student Name

XACC/291

11/14/2012

Instructor Name

Checkpoint: Recognizing Differences

Valuation is the process of determining what an asset or liability is actually worth. This is

done using either the absolute value model, option pricing model, or relative value model. The

reason an asset or liability would be evaluated for valuation include financial reporting,

investment analysis, and mergers. Depreciation helps to indicate how much of an asset’s value

has been used up, as well as the allocation of the cost of the asset to the specific periods in

which the asset was used. The IRS website tells us that “depreciation is an income tax deduction

that allows a taxpayer to recover the cost or other basis of certain property. It is an annual

allowance for the wear and tear, deterioration, or obsolescence of the property. Most types of

tangible property (except, land), such as buildings, machinery, vehicles, furniture, and equipment

are depreciable. Likewise, certain intangible property, such as patents, copyrights, and computer

software is depreciable” (2013, A Brief Overview of Depreciation, para. 1). Amortization is the

spreading of an intangible asset’s cost over the life of the asset. This is different from

depreciation as that is prorating the asset’s cost over the asset’s useful life. Amortization costs

are reported on the income statement as an expense over the life of that asset. An example of

Amortization would be a loan for a building purchase. Depletion is a method of accrual

accounting, allocating the cost of depletion of natural resources by the company. There are two

kinds of depletion: percentage and cost. Cost depletion allocates the costs of depletion over the

life of the asset. Percentage must be calculated by multiplying a