Depreciation - Essay Example

Download file to see previous pages The management of a business usually selects an appropriate method of depreciation depending on the kinds of assets employed in the business, the nature and purposes for which the assets are put to use in the business and the general conditions prevailing in the business environment. Sometimes the business may use a combination of one or more methods of charging depreciation. With this background, this paper analyses the calculation and accounting of depreciation for various kinds of assets in the light of the statement that "Accountants generally prefer to show fixed assets on the balance sheets of limited companies at their original cost, less an estimated amount of depreciation."
"The assets of a business arephysical resources owned and used by the business and arelisted on the balance sheet to reflect the value." The assets are classified into two major classifications: current assts and non-current assets. Current assets are those which can be or expected to be converted into cash within a short trading cycle usually a year or so. The current assets are usually short term assets and are meant to be for the short term use of the business. Examples of current assets are cash, inventory and receivables. The non-current assets representing fixed assets that are of long term or more permanent in nature employed in the business. The non-current assets include assets like land, buildings, plant and machinery, equipments and vehicles. The non-current assets have some characteristic features that are common to this class of assets.
The purpose of acquiring these assets is to use in the business as against converting into cash on a business venture.
Except for the investments in land, the cost of other non-current assets is gradually written off over the period of useful life. This amount that is being written off is being treated as an expense for doing the business and is reflected as depreciation in the profit and loss statement of the business. The depreciation is a periodic charge over the respective assets.
The dollar value of non-current assets is shown on the balance sheet as the original cost of the item at the time of purchase (the net asset value is calculated by deducting the accumulated depreciation from the marginal cost)(Business Victoria)
3.0 Definition of Depreciation:

A precise definition of depreciation may take the following form:
"Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is predetermined.
Depreciable assets are assets which
(i) are expected to be used during more than one accounting period; and
(ii) have a limited useful life; and
(iii) are held by an enterprise for use ...Download file to see next pagesRead More