Econometrica Vol. 11 No. 1 1943
General Theory of Plant Account Subject to Constant Mortality Law of Retirements
Abstract
WITHOUT GETTING INTO a detailed discussion of the ramifications of the concept of depreciation, it should be recalled that depreciation is based to a great extent upon the degree of loss of the service capacity of physical property. Where a plant account consists of property of the same type, such as electric meters, transformers, underground cable, etc., certain types of mortality laws are found to apply to the retirements from the account and when this is true it is possible to determine by well-known actuarial processes the expectation of life of this property at different ages. The variation of this expectation of life from age to age offers a basis for determining loss in service capacity of the property in question. Methods of estimating accrued depreciation, however, not only take into account loss in expected service capacity, but also are influenced by the accounting problem of amortizing the original plant investment over the life of the plant in a reasonably simple manner. The problem of determining depreciation of a plant is thus unavoidably composed of two elements: (1) Determination of variation of expected service capacity of plant in time, relative to expected service capacity when new; (2) the effect of such variation upon a simple and reasonable program of amortization. In this article certain aspects of the first element of the problem are considered; namely, the behavior of plant balance in relation to gross additions and retirements, under operation of a constant mortality law of retirement. The significance of these relationships lies in the effect they have upon the age distribution of the plant account at a given time, and the fact that knowledge of the age distribution and mortality law determines future expectation of life of plant at the time in question, relative to expectation of life when new, thus offering a basis, in many cases, for determination of relative loss in service capacity of plant. For example, a mortality law which can be approximated by
- DOI
- 10.2307/1905718
- Volume
- 11
- Issue
- 1
- Pages
- 61
- Sources
- openalex crossref