Definition
Backlog Depreciation is an accounting term that refers to the additional depreciation that arises when an asset is revalued. This revaluation can occur due to various reasons such as market conditions, changes in the economic lifespan of the asset, or updates in technological advances. When the value of an asset increases upon revaluation, the additional depreciation that is recognized in the accounts to reflect this new value is called “backlog depreciation.” This process simultaneously increases the accumulated depreciation for the asset.
Examples
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Example 1: Real Estate Asset
- Scenario: A company owns a building initially valued at $500,000. After a revaluation, the building is now considered to be worth $700,000.
- Calculation: The additional $200,000 increase in the asset’s value must be depreciated over the remaining useful life of the asset. The backlog depreciation is the added depreciation charge that needs to be coded into the accounts.
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Example 2: Machinery
- Scenario: A manufacturer revalues a piece of machinery from $100,000 to $120,000 due to upgrades that extend its useful life.
- Calculation: The additional $20,000 is subjected to depreciation over the machine’s remaining economic life. This results in an increased annual depreciation charge, recognized as backlog depreciation.
Frequently Asked Questions
1. What causes backlog depreciation?
There are several situations:
- Revaluation of assets due to market conditions.
- Changes in the expected useful lifespan of an asset.
- Upgrades and enhancements to the asset.
2. How is backlog depreciation recorded?
- Backlog depreciation is recorded as an increase in the asset’s accumulated depreciation on the balance sheet.
3. Why is backlog depreciation important?
- It ensures that the financial statements reflect the true current value of assets and their related depreciation expense, thereby providing a more accurate picture of the company’s financial health.
4. Does backlog depreciation affect cash flow?
- No, it is a non-cash expense. It affects the income statement by increasing depreciation expense, which reduces net income, but it does not impact cash flow directly.
5. When should an asset be revalued for backlog depreciation?
- Revaluation is typically done at regular intervals or when significant changes in market conditions or asset utility occur.
Related Terms
- Depreciation: The accounting process of allocating the cost of a tangible asset over its useful life.
- Accumulated Depreciation: The total amount of depreciation expense that has been recorded against an asset since it was put into use.
- Revaluation: The process of adjusting the book value of an asset to reflect its current market value.
Online References
- Investopedia: Depreciation
- AccountingTools: Revaluation of Fixed Assets
- CFI: Revaluation of Fixed Assets
Suggested Books
- “Financial Accounting” by Robert Libby, Patricia A. Libby, and Frank Hodge
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Principles of Accounting” by Belverd E. Needles, Marian Powers, and Susan V. Crosson
Accounting Basics: “Backlog Depreciation” Fundamentals Quiz
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