Podcast
Questions and Answers
What does the term 'depreciation' refer to in accountancy?
What does the term 'depreciation' refer to in accountancy?
- The increase in the fair value of an asset
- The allocation of the original cost of assets to periods in which they are used (correct)
- An increase in the value of an asset over time
- An actual reduction in the fair value of an asset
How does depreciation affect the balance sheet of a business or entity?
How does depreciation affect the balance sheet of a business or entity?
- It decreases the net income (correct)
- It increases the net income
- It has no effect on the net income
- It increases the fair value of the assets
Why do businesses depreciate long-term assets?
Why do businesses depreciate long-term assets?
- To increase their tax liability
- To decrease their tax liability (correct)
- To have no effect on their tax liability
- To avoid reporting net income
How is the cost of a tangible asset allocated in accounting statements?
How is the cost of a tangible asset allocated in accounting statements?
What is the impact of depreciating an asset on the income statement?
What is the impact of depreciating an asset on the income statement?
What is one of the purposes of allocating the original cost of assets to periods in which they are used?
What is one of the purposes of allocating the original cost of assets to periods in which they are used?
What is depreciation?
What is depreciation?
How is the depreciable basis generally calculated?
How is the depreciable basis generally calculated?
What criteria are involved in recording depreciation expense in financial reporting?
What criteria are involved in recording depreciation expense in financial reporting?
What is an impairment charge in accounting?
What is an impairment charge in accounting?
What is considered when determining impairment charges?
What is considered when determining impairment charges?
What does the depreciable basis generally include?
What does the depreciable basis generally include?
What is generally not ignored when calculating depreciable basis in some countries or for some purposes?
What is generally not ignored when calculating depreciable basis in some countries or for some purposes?
When are impairment charges recognized according to accounting rules?
When are impairment charges recognized according to accounting rules?
What does depreciation determine about an asset's value in the balance sheet?
What does depreciation determine about an asset's value in the balance sheet?
What is included in recording depreciation expense?
What is included in recording depreciation expense?
Study Notes
Depreciation in Accountancy
- Refers to the systematic allocation of the cost of a tangible asset over its useful life.
- Affects the balance sheet by reducing the book value of assets, reflecting usage and wear over time.
Purpose of Depreciation
- Businesses depreciate long-term assets to match expenses with revenue generated during the asset's use.
- This allocation leads to a more accurate financial picture, influencing investment and managerial decisions.
Cost Allocation in Accounting
- Cost of tangible assets is allocated based on their expected lifespan and usage patterns.
- This involves calculating a depreciable basis, which generally includes the purchase price plus any costs required to prepare the asset for use.
Impact on Income Statement
- Depreciation expense reduces taxable income, benefiting cash flow by lowering tax obligations.
- It reflects the expense associated with using an asset, impacting net profit.
Purpose of Cost Allocation
- Allocating original costs to periods when assets are used ensures that financial statements reflect reality, assisting in better financial planning and analysis.
Depreciable Basis Calculation
- Typically includes acquisition cost, installation, and any other costs necessary to ready the asset for its intended use.
- Some costs like taxes or shipping may also be included in specific contexts.
Recording Depreciation Expense
- Involves consistent and systematic recognition of depreciation to comply with accounting rules.
- Criteria for recording include the asset's useful life, usage, and method of depreciation chosen (e.g., straight-line, declining balance).
Impairment Charges
- An impairment charge represents a reduction in the carrying amount of an asset when its market value falls below its book value.
- Determining impairment involves assessing external factors (market conditions) and internal factors (asset performance).
Recognition of Impairment Charges
- Recognized when indicators of impairment are present and measurable, in accordance with accounting standards.
Asset Value on Balance Sheet
- Depreciation determines the carrying value of an asset, showing its reduced value as it ages and becomes less useful.
Elements in Recording Depreciation Expense
- Includes the annual depreciation charge, adjustments for impairment, and any disposals of the asset.
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Description
Test your knowledge of the concepts of depreciation in accountancy, including the actual reduction in the fair value of assets and the allocation of original costs to periods of use. Understand the methods and principles related to depreciation in accounting.
