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Depreciation

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Yi En

on 30 January 2015

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Transcript of Depreciation


Depreciation,
Provision for Depreciation,
Capital and Revenue Expenditure


Depreciation
A method that allocating the cost of a tangible asset over its useful life
Causes of Depreciation
Economic factors:
Causes of Depreciation
Method of
Calculating Depreiation Charges
There are two methods to calculate depreciation charges :
Provision for depreciation
a taxation and also an accounting term
Question 2 : Why businesses, companies, . include depreciation expenses and its provision in their financial statement?
Capital Expenditure
used by a company to obtain or even upgrade a business asset
Depreciation is a decrease in an asset’s value caused by certain unfavorable market conditions
Depreciation is even defines as a decrease due to wear and tear, decline in price, or decrease in purchasing or exchange value of the money
Accounting Purposes
shows that how much of an asset’s value has been used up from time to time
is used in accounting in order to try to match the expenses of certain asset to the income that the asset helps the company earn
Tax Purposes
businesses can deduct the cost of the assets they had purchased as their business expenses
But, businesses must depreciate all these assets based on the IRS rules about :
How and when
the deduction may be taken
according to

what the asset is
and also
how long will it lasts
Inadequacy
happens when an asset is no longer used as the changes in size and growth of the business
Obsolescene
the process that shows an equipment is out of date
Time
needed for wear and tear, or even for obsolescence and inadequacy to take place.
there are non-current assets to which the time factor is connected in a total different way.
Physical deterioration
Wear and tear
When a machinery, motor vehicle or even fixtures and fittings that are used will wear out eventually.
Rot, rust, decay and erosion
For example : land may be eroded or even wasted away by the action of rain, wind, sun or other element of the nature
Depletion
extraction of raw materials are then used by the business to do something else or are sold in raw state to other businesses
Straight line method
Reducing balance method
the liability of all the businesses
all those depreciation are accumulated in a reserve and is known as provision and depreciation
Straight line method
the number of years of use is estimated
The cost is then divided by the number of years.
This will gives the depreciation charge of each year
Reducing balance method
fixed percentage for depreciation is deducted from the cost of the first year
In second and also years the same percentage is taken from reduced balance
also known as diminishing balance method or diminishing debit balance method
By making this account, we do not need to credit the depreciation in a fixed asset’s account.
To make sure that a company’s balance sheet is accurately reflect the current value of the investments that it has made in fixed assets.

• Helps companies state the amount of expenses incurred as a result of using an asset during an accounting period

• Helps companies to report their assets correctly in the net book value

• Provides a way for recovering the purchase cost of an asset

• Helps those companies to generate their tax savings

Revenue Expenditure
Expenditure which is not spent on the increasing of the value of non-current assets, but is incurred in running the business in a day-to-day basis
also known as capital spending or capital expense
creates or add basis to the asset property
will usually give a lasting benefit or advantage to a company or business.

• Buying van
• Putting extra headlights on the van
• Buying machinery
• Painting the outside of new building
• Delivery cost
• Legal charges
Examples of Capital Expenditture
This expenditure is used up in a short time and does not add to the value of non-current asset
The Needs of Revenue Expenditure
To keep the business going on
Provide immediate benefits
Examples of Revenue Expenditure
Wages or salaries paid to factory workers.
Petrol costs for van
Repairs to van
Electricity costs of using machinery
Repainting the wall of the building

Those included in capital expenditures are the amounts spent on:
1. acquiring fixed and in some cases, intangible assets.
2. repairing an existing asset to improve its useful life
3. upgrading an existing asset if its results in a superior fixture
4. preparing an asset to be used in the business
5. restoring property or adapting it to a new or different use
6. starting or acquiring a new business

it plays a very large role in both of a company's balance sheet and its income statements
Full transcript