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Questions and Answers
What does depreciation in accountancy refer to?
What does depreciation in accountancy refer to?
How does depreciation affect the balance sheet of a business?
How does depreciation affect the balance sheet of a business?
Why do businesses depreciate long-term assets?
Why do businesses depreciate long-term assets?
What is the impact of depreciation on the income statement?
What is the impact of depreciation on the income statement?
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How is the cost of a tangible asset allocated through depreciation?
How is the cost of a tangible asset allocated through depreciation?
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Study Notes
Depreciation in Accountancy
- Depreciation refers to the allocation of the cost of a tangible asset over its useful life, representing the decrease in value of the asset due to wear and tear, obsolescence, or other factors.
Impact on Balance Sheet
- Depreciation reduces the carrying value of a tangible asset on the balance sheet, reflecting the asset's decreasing value over time.
- Accumulated depreciation, the total depreciation expense incurred to date, is reported on the balance sheet as a contra-asset account.
Purpose of Depreciation
- Businesses depreciate long-term assets to accurately reflect the asset's decreasing value and to match the cost of the asset with the revenue generated by the asset over its useful life.
Impact on Income Statement
- Depreciation expense is reported on the income statement, reducing net income and reflecting the cost of using the asset during the period.
- Depreciation is a non-cash expense, as it does not involve an actual outflow of cash.
Allocation of Asset Cost
- The cost of a tangible asset is allocated through depreciation by dividing the asset's cost by its estimated useful life, or by using a depreciation method such as the straight-line method or the declining balance method.
- Depreciation allocates the asset's cost to the periods in which the asset is used, rather than charging the entire cost to the period in which the asset is purchased.
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Description
Test your knowledge of accounting principles with this quiz on depreciation. Explore the concept of asset value reduction and the allocation of costs in accounting statements.
