Abstract

The article critically examines depreciation as a theoretical accounting concept and examines its importance as a source of financing to public utilities. Both America's accounting profession and public utility regulators follow the historic or traditional cost method in the treatment of depreciation. By this method, assets of a given type purchased during a time period, usually a year, are grouped together and depreciated on the basis of their average life expectancy. Original cost, physical life, and net salvage value on final disposal at the end of an asset's physical life are the cornerstones of this method. The accounting profession has stood behind the historic cost principle in these inflationary times largely on the basis of the accounting principle of consistency. It has rejected such proposals as the use of depreciation charges based on current price indexes because it would lead to too much confusion in the minds of those who read and evaluate financial statements.