One of the key tenets of Generally Accepted Accounting
Principles (GAAP) is the matching principle. The matching
principle states that companies should report associated costs
and benefits at the same time. If a company buys a $300 million
cruise ship in 1982 and then sells tickets to passengers for the
next 30 years, the company should not report a $300 million
expense in 1982 and then ticket sales for 1982 through 2012.
Instead, the company should spread the purchase price of the
ship (the cost) over the same time period it sells tickets (the
benefit). To create income statements that meet the matching
principle, accountants use an expense called depreciation. So,
instead of reporting a $300 million purchase expense in 1982,
the company might: Report a $30 million depreciation expense in
1982, 1983, 1984...and every year after that for the 30 years
the company expects to sell tickets to passengers on this cruise
ship. To calculate depreciation, a company must make estimates
and choices such as: The cost of