the municipal secretary desktop reference manual - Southwestern ...

NOTES
DEPRECIATION
A municipality with income-producing programs, such as sewer or water, normally
segregates the fiscal operations of these enterprises from a government=s other resources. Such a
practice is in accordance with generally accepted accounting principles.
The fiscal operations for these income-producing programs are maintained in what are known
as proprietary funds. In these funds, the accounting emphasis is on measuring net income.
Therefore, a proprietary fund=s fixed assets must be depreciated. Since income is determined by
subtracting expenses from revenue, one of the expense items incurred in generating a fund=s revenues
is depreciationCthe consumption of the asset.
Other service programs provided by a government are for the most part non-income
producing. The accounting emphasis therefore is not with measuring income. Rather, the concerns
are issues of control and accountability.
Fiscal activities for these programs are accounted for in one or more governmental funds.
Given the accounting emphasis, generally accepted accounting principles do not require that fixed
assets for these funds be depreciated or recorded in governmental funds.
Although generally accepted accounting principles do not call for the depreciation of a
governmental fund=s fixed assets, jurisdictions may want to do so. Such a practice would be most
appropriate in those instances where a local government wants to:
! develop a full cost fee or service charge structure;
! develop a rational program for an annual appropriation to a capital reserve fund.
If the fixed assets of one or more of those governmental funds are depreciated, these charges
are not recorded in the funds or in the account group established to record these fixed assets.
Depreciation is a process of converting the cost of an asset into an expense over its economic
or useful life. In developing depreciation plans or schedules, several factors must be considered:
! the original cost of the asset - this cost includes the purchase price plus any expenditures
necessary to get the asset ready for service;
! the asset's useful or economic life - the time frame in which the benefit flows exceed
cost flow-an asset=s economic life is determined at the time the asset is acquired B this
life estimate should not be changed during the time frame, as a general rule;
XII-19