Reflect on confidence and understanding. Connect to the business problem. Preview straight-line depreciation.
What You Learned Today
You now know how to decide whether a purchase is an asset or an expense, how to estimate useful life and salvage value, and how to calculate the depreciable base. These are the foundations for every depreciation method you will learn.
Capitalization Rule
Capitalize if the item lasts more than 1 year AND the cost is significant. Otherwise, expense it immediately.
Depreciable Base
Depreciable Base = Cost - Salvage Value
This is the amount spread across the asset's useful life.
Useful Life
How many years the asset provides value. Estimated by management based on experience and industry standards.
Accumulated Depreciation
The running total of all depreciation recorded. It grows each year and reduces book value.
Sarah needs to classify every purchase correctly so her financial statements tell an honest story. If she expenses a $15,000 printer, her profit looks terrible this year and too good in future years. If she capitalizes a $200 supply purchase, she is overstating her assets.
The signal that tells you to use capitalization is simple: does this purchase provide value for more than one year, and is the cost significant enough to track?If yes to both, it is an asset. If not, it is an expense.
Reflect on Your Learning
Take a few minutes to think through these prompts. There are no wrong answers — this is about processing what you learned today.
Now that you know what to depreciate (the depreciable base) and how long to depreciate it over (useful life), the next lesson teaches you how much to depreciate each year.
Straight-Line Depreciation = Depreciable Base ÷ Useful Life
For Sarah's 3D printer: $13,000 ÷ 7 years = $1,857 per year. The same amount every year — simple, predictable, and the most commonly used method.