4. Depreciation
Depreciation represents the gradual reduction in the value of tangible fixed assets over time due to usage, obsolescence, and other factors. It plays a crucial role in accounting by ensuring financial accuracy regarding asset values and is a deductible expense for tax purposes. Various methods for calculating depreciation, such as Straight-Line and Written Down Value, have different implications for financial reporting and asset management.
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What we have learnt
- Depreciation is the allocation of an asset's cost over its useful life.
- Different depreciation methods yield various effects on financial statements.
- Understanding and applying depreciation correctly enhances financial accuracy.
Key Concepts
- -- Depreciation
- The reduction in the value of an asset due to factors like wear and tear, obsolescence, and time.
- -- StraightLine Method
- A method of calculating depreciation where the asset's cost is equally spread over its useful life.
- -- Written Down Value Method
- A method of calculating depreciation based on a fixed percentage of the asset's book value.
- -- Salvage Value
- The estimated value of an asset at the end of its useful life, considered in depreciation calculations.
- -- Useful Life
- The estimated period during which an asset is expected to be used.
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