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Depreciation and Amortisation - 1 Video Lecture - Crash Course for CA Foundation
FAQs on Depreciation and Amortisation - 1
| 1. What is depreciation, and why is it important in accounting? |  |
Ans. Depreciation is the systematic reduction in the recorded cost of a fixed asset over its useful life. It is important in accounting because it helps businesses allocate the cost of an asset over the period it is used, ensuring that expenses match the revenue generated by the asset. This provides a more accurate representation of a company’s financial performance.
| 2. What are the different methods of calculating depreciation? | |
Ans. The main methods of calculating depreciation include the Straight-Line Method, Declining Balance Method, and Units of Production Method. The Straight-Line Method spreads the cost evenly over the asset's useful life, while the Declining Balance Method applies a fixed percentage to the asset's remaining book value, leading to larger deductions in the earlier years. The Units of Production Method bases depreciation on the asset's usage rather than time.
| 3. How does depreciation affect financial statements? | |
Ans. Depreciation affects financial statements by reducing the book value of fixed assets on the balance sheet and increasing expenses on the income statement. This leads to a lower net income, which can affect profitability ratios. However, it also reduces taxable income, providing tax benefits for the business.
| 4. What is the difference between book value and salvage value in depreciation? | |
Ans. Book value is the value of an asset as recorded on the balance sheet, calculated as the original cost minus accumulated depreciation. Salvage value, on the other hand, is the estimated residual value an asset will have at the end of its useful life after depreciation has been fully applied. Understanding both values is crucial for calculating depreciation accurately.
| 5. How do tax regulations influence depreciation methods? | |
Ans. Tax regulations can influence depreciation methods by allowing businesses to choose specific methods that optimize their tax liabilities. For example, the Modified Accelerated Cost Recovery System (MACRS) in the U.S. allows for accelerated depreciation, enabling businesses to recover costs more quickly, which can lead to tax savings. Companies must adhere to tax laws while selecting a depreciation method to ensure compliance and maximize benefits.
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Apr 13, 2026 Last updated
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