Depreciation and Sale of Asset
Depreciation is the decline in the future economic benefits of a depreciable non-current asset through wear and tear and obsolescence. It is an allocation process. It can be calculated by two main methods, each reflecting in a distinct prospect in the way the asset is used. Depreciation is to be treated as an estimated expense that does not set aside cash for the replacement of a non-current asset. In determining the cost of acquisition of the lathes, any capital expenditure made must be added to the purchase price of the lathes. This amount will be considered as the historical cost and will be used in calculating the depreciation expenseDepreciation is the allocation of the cost of a non-current asset less its estimated disposal value against revenue over the assets useful life. A depreciable asset is an asset that will be used over more than one accounting period and will gradually contribute to revenue over its useful life. However, it will give rise to future expenses as their future economic benefits are used up or expired. Examples of depreciable assets include machinery and motor vehicles. Generally, most non-current assets, with the exception of land, decline in their potential to provide future economic be
Depreciation allocates the assets cost or depreciable amount over the estimated useful life of the asset to the entity. It is not a process of asset valuation. The cost of the asset less the accumulated depreciation is not intended to give the current market value of the asset as the asset purchased is not intended for re-sale but use in the business. In determining the cost of a non-current asset such as a lathe, expenditure that will provide future economic benefit, i.e. contribute to the revenue earning capacities of the business for more than one year, must be considered and added to the asset value. This expenditure is known as capital expenditure and is usually of a once-off nature. Examples of capital expenditure are, upgrading machine parts of the lathes to achieve an improvement in the quality or productivity of the output. Another type of expenditure that can be made is revenue expenditure. Revenue expenditure is expenditure on assets that contribute to the revenue earning capacity, but will be used up within an accounting period. This expenditure is not added to the asset value but deducted from the revenue to find the profit. Examples of revenue expenditure include, advertising of a manufacturing business any repairs made to non-current assets, in this case the lathes. From the two methods of depreciation mentioned above, the most suitable method for depreciating the lathes would be the reducing balance method. Machinery like the lathes a
Some common words found in the essay are:
, useful life, reducing balance method, balance method, future economic, non-current asset, depreciation expense, reducing balance, accounting period, future economic benefit, assets useful life, historical cost, revenue expenditure, purchase price, acquisition lathes capital, provide future economic,
Approximate Word count = 993
Approximate Pages = 4 (250 words per page double spaced)
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