Causes of Depreciation:
- Normal Physical Wear and Tear: Due to normal use of the assets, the assets deteriorate physically, which results in reduction in their value.
- Efflux of Time: Certain intangible assets have fixed life span such as Trade Marks, Patents or Copyrights etc. ...
- Obsolescence: Research & Development leads to innovations, in the form of better and technically advanced machines that scrap old machines even though they may be capable of being run ...
- Accidents: Destruction or damage caused by an accident may result in reducing the value of assets. ...
What are the factors of depreciation determination?
What are the basic factors of depreciation determination? The original cost of the asset. The estimated working life of the asset or the number of years the asset is expected to last. The estimated residual or scrap value at the end of its life. It is the value which the asset will fetch when discarded as useless.
What are the causes of depreciable assets?
Depreciation is caused mainly from wear and tear when the asset is in use and from erosion, rust, rot and decay when it is exposed to wind, rain, sun and other elements of nature. These arise due to obsolescence and inadequacy. Obsolescence means the process of becoming obsolete and out of date.
What are depreciation depletion depreciation and amortization?
Depreciation, depletion, and amortization all involve the allocation of the cost of a long-lived asset to expense. T/F The cost of an asset less its salvage value is its depreciation base. T/F The three factors involved in the depreciation process are the depreciation base, the useful life, and the risk of obsolescence.
What are the four methods of depreciation?
There are four methods for depreciation: straight line, declining balance, sum-of-the-years' digits, and units of production. To use the straight-line method, the asset's useful life (typically in years) and the salvage value ( scrap value) at the end of its life must be estimated.
What are the three factors used to determine depreciation?
Factors Affecting the Amount of DepreciationCost of the Asset. The cost of the asset includes the invoice price of the asset less any trade discount, in addition to all costs that were essential to bring the asset to a useable condition. ... Estimated Scrap Value. ... Estimated Useful Life.
What is the factors of depreciation?
Factors Affecting Depreciation Calculation. Certain factors enter into consideration for determining depreciation. They are Value of assets, Estimated working life, Repairs and renewal, Addition and extension, Scrap value, Loss of interest on capital invested and Legal provisions.
What is depreciation and explain any three methods of depreciation?
In Accounts, Depreciation can be defined as the method of allocating the cost of a physical asset over its useful life or the time period it is to be used for. In simple words, depreciation is the reduction in the value of an asset due to the passage of time, normal wear and tear and obsolescence.
What are the factors that affect computation of depreciation on fixed assets?
Four Factors That Affect the Computation of DepreciationCost. Net purchase price. All reasonable and necessary expenditures to get the asset in place and ready for use.Residual value (salvage or disposal value). An asset's estimated net scrap, salvage, or trade-in value as of the estimated date of disposal.
What is the process of depreciation?
Depreciation is the process of allocating the depreciable cost of a long-lived asset, except for land which is never depreciated, to expense over the asset's .
What are the types of depreciation in accounting?
Various Depreciation MethodsStraight Line Depreciation Method.Diminishing Balance Method.Sum of Years' Digits Method.Double Declining Balance Method.Sinking Fund Method.Annuity Method.Insurance Policy Method.Discounted Cash Flow Method.More items...•
What three 3 factors are needed to compute calculate depreciation for a fixed asset?
There are various ways of calculating depreciation. To start, a company must know an asset's cost, useful life, and salvage value. Then, it can calculate depreciation using a method suited to its accounting needs, asset type, asset lifespan, or the number of units produced.
What are the factors of depreciation determination?
What are the basic factors of depreciation determination? The original cost of the asset. The estimated working life of the asset or the number of years the asset is expected to last. The estimated residual or scrap value at the end of its life. It is the value which the asset will fetch when discarded as useless.
Who gives their opinion about rate of depreciation?
Usually engineers and experts give their opinion about these and they are accepted by businessmen. After getting information on all these points, it is easy to access the rate of depreciation.
What is the possibility of an asset becoming obsolete?
If there are great chances of improvements being made in a particular asset on account of inventions, higher depreciation should be written off such an asset.
What is depreciation of assets?
As already stated, depreciation is not an attempt to record the changes in the market value of the asset but a systematic allocation of the total cost of depreciable asset (capital expenditure) to expenses (revenue expenditure) over the useful life of the asset because market value of some assets may increase in short run but even then the depreciation process continues. Based on the matching principle a reasonable portion of capital expenditure (i.e. the cost of the asset) should be charged to revenue during the useful life of an asset.
What is the definition of depreciation?
-Pickles. ADVERTISEMENTS: “Depreciation may be defined as a measure of the exhaustion of the effective life of an asset from any cause during a given period .” -Spicer and Pegler.
What is the actual cost of an asset?
Actual Cost of the Asset: ADVERTISEMENTS: Actual cost or historical cost means the acquisition cost of the asset and includes all incidental expenses which are necessary to bring the asset to its present condition and location.
Is depreciation expense based on actual loss?
Thus, calculation of depreciation expense is just an estimated loss in value of assets and not the real and exact decrease in value of an asset.
Is depreciation permanent?
Decline in the value of asset is permanent in nature. Once reduced, it cannot be restored to its original value. (ii) Depreciation is a gradual and continuous process because value of asset is reduced, either with use of asset or due to expiry of time. (iii) It is not a process of valuation of asset. It is the process of allocating cost of an asset ...
What causes depreciation?
Depreciation is caused mainly from wear and tear when the asset is in use and from erosion, rust, rot and decay when it is exposed to wind, rain, sun and other elements of nature.
Why is depreciation important?
The method of depreciation is a very important factor in the allocation of net cost of an asset to each of the accounting periods in which the asset is used . There are a number of methods, which may be used in calculating the periodic depreciation charges. Different methods may give significantly different values.
What is depreciation base?
Depreciation base refers to the cost to be recovered over a period of time of use. Higher the depreciation base, higher will be the depreciation charge. It depends up on the cost of asset, salvage value and removal cost.
Why do coal mines lose their utility?
Some assets like coal mines, ore and oil deposits lose their utility and value due to extraction of deposits from them. The charge of depletion is made on the basis of consumption of the concerned asset.
What is the cost of asset?
The cost of asset includes the purchase price plus installation charges.
Do assets lose value with time?
Some assets lose their value simply with the passage of time. Intangible fixed assets such as lease, patents, copyrights, etc., lose their working capacity over a period of time, if such assets are not used at all.
What is depreciation based on?
Depreciation is based on the decline in the fair market value of the asset. T/F
What is the cost of an asset less its salvage value?
The cost of an asset less its salvage value is its depreciation base. T/F
How to determine if an impairment has occurred?
The first step in determining whether an impairment has occurred is to estimate the future net cash flows expected from the use of that asset and its eventual disposition. T/F
How are changes in estimates handled?
Changes in estimates are handled prospectively by dividing the asset’s book value less any salvage value by the remaining estimated life.
What is the replacement of one asset with another more efficient and economical asset?
Inadequacy is the replacement of one asset with another more efficient and economical asset. T/F
When is unit of production appropriate?
The units-of-production approach to depreciation is appropriate when depreciation is a function of time instead of activity. T/F
What is profit margin on sales ratio?
The profit margin on sales ratio is a measure for analyzing the use of property, plant, and equipment. T/F
What are the factors involved in depreciation?
The three factors involved in the depreciation process are the depreciation base, the useful life, and the risk of obsolescence.
What is depreciation based on?
Depreciation is based on the decline in the fair market value of the asset.
How to determine if an impairment has occurred?
The first step in determining whether an impairment has occurred is to estimate the future net cash flows expected from the use of that asset and its eventual disposition.
How are changes in estimates handled?
Changes in estimates are handled prospectively by dividing the asset's book value less any salvage value by the remaining estimated life.
What is profit margin on sales ratio?
The profit margin on sales ratio is a measure for analyzing the use of property, plant, and equipment.
When is unit of production appropriate?
The units-of-production approach to depreciation is appropriate when depreciation is a function of time instead of activity.
Does declining balance deduct salvage value?
The declining-balance method does not deduct the salvage value in computing the depreciation base.
What does "debited" mean in a financial statement?
A) the total amount to be charged (debited) to expense over an asset's useful life.
Does declining balance deduct salvage value?
True or False: The declining-balance method does not deduct the salvage value in computing the depreciation base.
Is depreciation a matter of valuation?
True or False: Depreciation is a means of cost allocation, not a matter of valuation. True. True or False: Depreciation is based on the decline in the fair market value of the asset. False. True or False: Depreciation, depletion, and amortization all involve the allocation of the cost of a long-lived asset to expense. True.
What are the contributing factors to depreciation?
Another important contributing factor to depreciation is accident such as plant break down, loss by fire, etc. ADVERTISEMENTS: (iii) Expiration of Certain Legal Rights: In case of patents, leases and licenses depreciation is a time function as by the expiration of time for which legal right to use is created lapses.
What is the concept of depreciation?
Concept of Depreciation: One of the basic objectives of financial accounting it to calculate the true profit or loss from the operations of the enterprise for a particular period. As per matching principle of accountancy the costs of the product must be matched with the revenues in each period. This principle indicates ...
What is depreciation in advertising?
ADVERTISEMENTS: 2. Definition of Depreciation: The term depreciation is derived from the Latin words ‘do’ meaning down and ‘pretium’ meaning price. In common use it means putting down the value of an asset due to wear and tear, passage of time, obsolescence, etc.
What is the gradual and permanent decrease in the value of an asset from any cause?
According to J.N. Carter, “Depreciation is the gradual and permanent decrease in the value of an asset from any cause,” J.R. Batiliboi defined depreciation as follows:
Why do we put assets out of use?
It is because of inadequacy. Inadequacy refers to the termination of the use of an asset because of growth and changes in the size of the firm. For the needs of the firm the asset may not be adequate and another firm of small size may buy it.
What is the term for the loss of a fixed asset?
When a fixed asset is put to use then that part of its value which is lost or which cannot be recovered is known as depreciation. One of .the main characteristics of fixed assets is that because of their physical deterioration while in use their productive capacity can be held constant by putting periodic services to the asset but then the maintenance cost will increase with the life of the asset.
What is fixed asset?
Fixed assets are those which are of material value, not meant for re-sale and having fairly long life and are used in the business. With the exception of land, all fixed assets have a limited useful life such as plant and machinery, furniture, motor van and buildings.
What Are the Different Methods for Calculating Depreciation?
In the United States, accountants must adhere to generally accepted accounting principles (GAAP) in calculating and reporting depreciation on financial statements. GAAP is a set of rules that includes the details, complexities, and legalities of business and corporate accounting. GAAP guidelines highlight several separate allowable methods of depreciation that accounting professionals may use. 1
What is depreciation in accounting?
Depreciation accounts for decreases in the value of a company’s assets over time. Accountants must adhere to generally accepted accounting principles (GAAP) for depreciation. There are four methods for depreciation allowable under GAAP, including straight line, declining balance, sum-of-the-years' digits, and units of production.
What is GAAP in accounting?
GAAP is a set of rules that includes the details, complexities, and legalities of business and corporate accounting. GAAP guidelines highlight several separate allowable methods of depreciation that accounting professionals may use. 1 .
What is the declining balance method?
The declining balance method is a type of accelerated depreciation used to write off depreciation costs more quickly and minimize tax exposure. With the declining balance method, fixed assets depreciate at an accelerated rate rather than evenly over the asset's estimated useful life.
When to use double declining balance?
This method is often used if an asset is expected to have greater utility in its earlier years. This method also helps to create a larger realized gain when the asset is actually sold. Some companies may also use the double-declining balance method, which is an even more aggressive depreciation method for early expense management.