Navneet Singh
Published:
Total Pages: 72
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Depreciation is the process of allocating the cost of a tangible asset over its useful life. It represents the reduction in the value of an asset due to wear and tear, obsolescence, or the passage of time. Depreciation is an essential concept in accounting because it helps match the cost of using an asset with the revenue it generates over its useful life. Here are the key points about depreciation: Purpose: Depreciation is recorded to reflect the decrease in the value of tangible assets over time. It allows businesses to allocate the cost of an asset over its useful life rather than expensing the entire cost in the year of purchase. Methods: There are several methods of depreciation, including straight-line depreciation, declining balance depreciation, and units of production depreciation. Each method allocates the cost of the asset differently over its useful life. Recording: Depreciation expense is recorded on the income statement as an operating expense. It reduces the net income and reflects the consumption of the asset's value over time. Simultaneously, accumulated depreciation is recorded on the balance sheet as a contra-asset account. It represents the total depreciation expense recognized for the asset since its acquisition. Useful Life and Salvage Value: Depreciation calculations consider the estimated useful life of the asset and its salvage value (the estimated value of the asset at the end of its useful life). The difference between the asset's cost and its salvage value is spread over its useful life to determine the annual depreciation expense. Impacts: Depreciation affects both the income statement and the balance sheet. It reduces the net income and, consequently, the taxes payable. Additionally, it reduces the carrying value of the asset on the balance sheet, reflecting its decreased value over time. Overall, depreciation is a critical accounting concept used to accurately reflect the consumption of an asset's value over its useful life and to ensure the financial statements provide a true and fair view of a company's financial position and performance.
