Depreciation

• Matching principle in standard accrual-basis accounting requires that costs be recorded in the same time periods as the benefits their occurrences helped produce. Since assets depreciate -- decline in value through usage -- this principle requires these declines be recorded in each period of the asset's use as depreciation expenses. Depreciation expenses are deducted from the asset's original purchase price and estimated using mathematical patterns that approximate but do not duplicate the actual patterns of value loss in the asset. For example, if a car was purchased for $120,000, then its depreciation expenses are calculated per period and accrued in an Accumulated Depreciation account used to record how much of the $120,000 value has been lost.
  
  

Capital and Revenue Expenditures

• Revenue expenditures are recorded as expenses on the income statement in a single time period because their benefits are restricted to that period. Examples of revenue expenditures include car washes and waxing. In contrast, capital expenditures benefit the spender across multiple time periods and must therefore be recorded as such. Capitalization is the process via which an expenditure is recorded as an asset so depreciation becomes possible.
  
  

Capitalized Cost

• Car accessories that improve the vehicle's efficacy and/or efficiency at the intended purpose of benefiting its owner can be considered capital expenditures. Although certain capital expenditures are capitalized as independent assets, most are added onto the base asset. In this case, the value of certain car accessories is added to that of the vehicle itself. Examples include both headlights and bug shields.
  
  

Depreciation of Capitalized Costs

• Capitalized car accessories change the value of the base asset and can alter its useful lifespan and residual value upon disposal. The normal procedure for handling this is to continue using the original depreciation method, but to swap out parameters where these change due to the capitalization process. Discrepancies arising due to these changes in the middle of the asset's lifespan are resolved at the end of its usefulness by assigning a depreciation expense equivalent to whatever is left of its depreciable value.