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Why do we Depreciate? Video Lecture | Accountancy Class 11 - Commerce

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FAQs on Why do we Depreciate? Video Lecture - Accountancy Class 11 - Commerce

1. Why do we depreciate?
Ans. We depreciate assets to reflect their decrease in value over time due to wear and tear, obsolescence, or aging. This is done to accurately represent the asset's current worth on the company's financial statements.
2. How is depreciation calculated?
Ans. Depreciation is calculated by dividing the cost of an asset by its useful life. The useful life is an estimate of how long the asset will be economically useful to the company. The resulting value is then allocated as an expense over the useful life of the asset.
3. What are the different methods of depreciation?
Ans. There are several methods of depreciation, including straight-line depreciation, declining balance depreciation, and units of production depreciation. Straight-line depreciation evenly allocates the cost over the asset's useful life, declining balance depreciation front-loads the expense in the earlier years, and units of production depreciation considers the asset's usage or production output.
4. How does depreciation affect taxes?
Ans. Depreciation can have a significant impact on taxes. The depreciation expense is deducted from the company's income, reducing the taxable income. This, in turn, lowers the amount of taxes the company has to pay. By reducing taxable income, depreciation provides a tax benefit for businesses.
5. Can you provide an example of depreciation?
Ans. Certainly! Let's say a company purchases a delivery truck for $50,000 and estimates its useful life to be 5 years. Using the straight-line depreciation method, the annual depreciation expense would be $10,000 ($50,000 divided by 5 years). Each year, the company would record a depreciation expense of $10,000 on its financial statements, reflecting the decrease in value of the truck over time.
82 videos|105 docs|42 tests

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