Lack Of Depreciation Essay

Depreciation is the loss in value of an asset over time until the value becomes zero or negligible. A company can deduct the cost of the fixed assets by making sure they are in compliance with the relevant tax laws. When a company makes large purchases, they will record the items as assets. Examples of fixed assets are buildings, computers, and furniture or in the construction industry machinery etc. The only asset that cannot be depreciated is Land. This is because the value of land increases with time. Expensing these items when purchased would create an inaccurate net income i.e. profit overstated. All fixed assets are expected to be less efficient as time goes on. During each accountancy period a calculated cost of these assets is used

It helps companies accurately state incurred expense. Lack of depreciation can lead to over or under stating total asset expenses, this can then lead to misleading financial information.

2. It also helps businesses report the correct net book value of a given asset. Assets experience wear and tear from daily use, the actual value declines over time, depreciation helps show this.

3. Depreciation allows for companies to spread the cost of an asset over it’s lifespan. This allows companies to replace future assets using the appropriate amount of revenue.

4. There are tax rules that make depreciation tax deductible. A greater depreciation expense lowers taxable income and increases tax

This method is the most common one used to calculate depreciation. An example of this would be: the annual depreciation on a machine with a useful life of 5 years, a salvage value of €1000 and a cost of €10,000 is €1,800 ((€10,000-€1,000)/5).

• Double Declining Balance – this is a method used to write off depreciation costs more quickly and minimize tax exposure. If an asset has an estimated useful life of 8 years, straight-line depreciation would be at an average annual rate of 12.5%. However, under this method, a 25% rate would be used. The declining balance method applies a higher depreciation charge to the first year of an asset 's life and then gradually decreases depreciation expenses for future years.

• Sum-of-the-Years ' Digits Depreciation - Annual depreciation is separated into fractions using the number of years of the asset 's useful life. For example, an asset with a useful life of five years will have a sum-of-the-years value of 15 (5+4+3+2+1). The first year’s value would be 5, the second year a value of 4 etc. Therefore, the first years depreciation would be calculated as 5/15 given them a depreciation percentage of 33%. Year 1 = 5/15 = 33.3% times the cost (or cost less