practical question 3 !! Related: Concept and Accounting of Depreciati...
Depreciation is a process of allocating the cost of a fixed asset over its useful life. In the previous two parts of this series, we discussed the concept of depreciation and its accounting. In this part, we will further elaborate on the concept of depreciation and its accounting.
Types of Depreciation
There are different types of depreciation, including:
1. Straight-Line Depreciation: It is the most commonly used method of depreciation. Under this method, the cost of the asset is divided by its useful life, and the same amount is charged as depreciation each year.
2. Diminishing Balance Depreciation: Under this method, a fixed percentage of the asset's book value is charged as depreciation each year. This percentage is higher in the initial years and gradually decreases as the asset gets older.
3. Units of Production Depreciation: Under this method, depreciation is charged based on the actual usage of the asset. The cost of the asset is divided by its estimated total production or usage, and the same amount is charged for each unit produced or used.
Factors Affecting Depreciation
The following factors affect the calculation of depreciation:
1. Cost of the Asset: The cost of the asset is the basis for calculating the depreciation.
2. Useful Life: The useful life of the asset is the period over which the asset is expected to generate revenue for the business.
3. Salvage Value: The salvage value is the estimated value of the asset at the end of its useful life.
4. Depreciation Method: The method of depreciation used will determine the amount of depreciation charged each year.
Accounting for Depreciation
Depreciation is recorded as an expense in the income statement and as an accumulated depreciation account on the balance sheet. The accumulated depreciation account is a contra asset account, which means it reduces the value of the asset.
Conclusion
Depreciation is an important concept in accounting as it helps businesses allocate the cost of fixed assets over their useful lives. There are different types of depreciation, and the calculation of depreciation depends on factors such as the cost of the asset, useful life, salvage value, and depreciation method. Depreciation is recorded as an expense in the income statement and as an accumulated depreciation account on the balance sheet.
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