18. Depreciation Accounting
Depreciation accounting is essential for accurately reflecting the value of fixed assets over time, addressing factors like wear and tear and obsolescence. It facilitates the matching of costs with revenues and aids in financial reporting and planning. Understanding various depreciation methods helps ensure effective asset management and compliance with accounting standards.
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What we have learnt
- Depreciation systematically allocates the cost of a fixed asset over its useful life.
- Various methods exist to calculate depreciation, each suitable for different types of assets.
- Depreciation impacts financial statements, reducing profit and reflecting the asset's diminished book value.
Key Concepts
- -- Depreciation
- The systematic allocation of the cost of a tangible fixed asset over its useful life.
- -- Straight Line Method
- A method of depreciation where the same amount is charged each year, calculated based on the cost of the asset minus the residual value, divided by the useful life.
- -- Written Down Value Method
- A method where depreciation is charged at a fixed percentage on the book value of the asset, resulting in higher depreciation in early years.
- -- Sum of Years' Digits Method
- An accelerated method of depreciation where more expense is recognized in the early years of an asset's life.
- -- Units of Production Method
- A method that calculates depreciation based on the actual usage or output of the asset during a period.
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