The University of Tennessee, Knoxville

Tennessee County Municipal Advisory Service

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Reference Number: MTAS-841
Tennessee Code Annotated
Reviewed Date: September 05, 2017
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One of the most misunderstood aspects of water and sewer utility accounting is depreciation. Because depreciation does not involve paying out cash funds, like all other expenses, many city officials don’t want to recognize it as a legitimate expense. In accounting terms depreciation is the orderly write-off of a long-term asset over its useful life. Rather than expensing a new piece of equipment, such as a truck, at the time of the purchase, a portion of the cost of the truck is expensed each year for several years. In reality, depreciation is very important to a city’s utility operation for another reason. By funding for the depreciation expense each year, the utility can set aside funds to purchase a new truck when the old one is no longer of use. Depreciation provides the city with an orderly way to have the funds necessary for new capital purchases. Rather than being viewed in a negative way, depreciation should be seen for its positive results.