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Depreciation of Fixed Assets and Provision for Depreciation

Depreciation of Fixed Assets and Provision for Depreciation.JPG
Depreciation of Fixed Assets and Provision for Depreciation.JPG

Depreciation of Fixed Assets and Provision for Depreciation

Task 1

From definition of the term, depreciation refers to the act of subtracting or reduction in the value of an asset, which trickles downwards as an asset ages. In the final accounts of a company, depreciation is essential since tracks down how the value of an asset reduces every year allowing the company to decide whether they should acquire another asset or proceed to use the existing one. Secondly, using depreciation, accountants can evaluate the market value of an asset further establishing the profit or loss that is attributable to the sale of the asset. In addition, depreciation in the non-cash expenditure allows an organisation to ascertain the tax benefit that accrue to the financial statements of a company.

Provision for depreciation is guided by several reasons among them is the ease of facilitating the calculation of true profits especially considering depreciation just as any other expense is directly relatable to the cost of production. It is usually advisable to charge depreciation towards the fixed assets since it facilitates the earning processes. Hence, depreciation needs to be subtracted from income that is earned allowing facilitation of the true profit or loss. Provision for depreciation also makes it easy for the organisation to avoid overstating figures and still accommodate for the replacement of such assets. If such provisions are not made, then the shareholders would demand distribution of the monies as dividend. There are different methods that determine how provision should be calculated. The most prominent are the straight-line and the double-declining balance method.

Aggregate depreciation looks at the overall sum of the amounts that address the declining value of various assets.

The net book value is the amount, which is recorded to be the cost of an asset on its accounting records.

The profit or loss on disposal is

5,000 3,500 = 1,500

Straight Line

10/100 * 30,000 = 3000

Straight Line MethodReducing Balance Method
YearCurrent Value of AssetDepreciation ValueCurrent Value of AssetDepreciation Value
0300003000300007500
1270003000225005625
224000
321000
418000
515000
612000
79000
86000
93000
100

Answer

In this case, I would opt for the straight-line method since it pays much faster allowing one to recover the asset much quicker.      

The reducing balance is much more effective owing to the structure of the calculations. In a normal environment, the value of asset would not decline equally for all the years. The reducing balance methods tends to address this by relying on the accumulated depreciation to obtain the optimum value equally for the useful life of the asset.

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Other Assignment that we have handled on this discipline are Mergers and Acquisitions, the Harrold PLC and Others which are here 

Depreciation of Fixed Assets and Provision for Depreciation

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