Depreciation and Extra Ordinary Items
Depreciation is the portion of the tangible capital asset deemed consumed or expired. The standard accounting practice is to spread such depreciation over several years, based on the generally accepted accounting standards. For instance, in straight-line deprecation, the cost of the asset divides equally over the expected life of the product. The Modified Accelerated Cost Recovery System (MACRS) (the prevalent depreciation system stipulated by the IRS), uses annual deduction of the value of assets based on detailed tables published by the IRS that denotes lives by classes of assets.
Extraordinary items require special reporting in the balance sheet -- reporting abnormal or unusual transactions that do not occur frequently and are unlikely to recur. Such items are included in the income statement in a separate section.
Extraordinary items can include losses related to an unexpected natural disaster, expropriation, prohibitions under new regulations and so on. A single item can find inclusion as both an extraordinary item and a standard item, depending on the nature of the business.
For instance, an agricultural company in Canada losing plants owing to frostbite, cannot claim the same as an extraordinary item, as frost is a regular occurrence in Canada. A company in New Mexico can, however, claim crop loss owing to frostbite as an extraordinary item, as frostbite is a highly unlikely occurrence in the tropics and unlikely to recur in the foreseeable future. Similarly, some instances such as normal disposal of company assets, as part of renovation or overhaul, do not constitute an extraordinary item, but loss of machinery owing to lightning strike may constitute an extraordinary item.
Accounting standards do not allow including regular and normal depreciation expenses as an extraordinary item.