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Importance of Depreciation Calculation (Accounting) in Academic Curriculum
Depreciation refers to wear and tear cost of fixed assets. In other words, it shows the fall in the amount or value of the asset. It has been charged to create a fund or an approx summed value for any miss-happening. Depreciation is charged continuously in the books of accounts. It is shown on the liabilities side and sometimes in the asset with a working note deducting from the asset. Every writer explains the definition in their ways and words. A well-given statement by Institute of Cost and Management Accountants (ICMA), London describe it in words stating "Depreciation is the diminution in intrinsic value of the asset due to use and/or lapse of time."
Some notable highlights of Depreciation being charged reduce the value of tangible assets. It affects the book value of the assets not its market value (Note: market value of the asset may be higher or lower depending on time and market situation). It is a non-cash process. The amount has been showed in the books of accounts and is kept as a reserve but not withdrawn. It also is shown in the profit and loss account.
Difficulties faced by student while solving Depreciation Calculation (Accounting) problems
When the depreciation is charged and credited to the asset account, this is the simplest method under which the depreciation directly charged from the asset account. It shows the deduction in the price of the asset. The depreciation account is settled down by transferring the amount to profit and loss account. This method is simple, but there is a limitation to it the ascertainment of the exact amount of the asset and the depreciation charged becomes difficult.
When a provision for depreciation/Accumulated Depreciation Account is maintained. In this method, an entirely different account is being made for the calculation of depreciation. The above mentioned two are the two ways of recording the depreciation in the books of account. It is calculated in two ways Straight line method and Written down Value method. Both the methods have entirely different ways of calculating the depreciation.
Depreciation Calculation Problems Solutions - Assignment Writing Service Online
Straight line method is easy and simple where every year the same amount is being deducted from the value of the asset. Despite the value or amount, it is showing. It is being charged by Cost-Estimated Scrap Value/Number of years of expected life.
Written down value method where the amount of depreciation is changed every year depending on the remaining value of the asset. It is also called diminishing balance method.
Students usually get confused while learning these methods. The methods are not so difficult to understand and solve, but there are minor points which create confusions and issues for the students. They got confused between both the methods. Students sometimes got confused amongst the two not only confusion they sometimes commit a mistake in the calculation of the amount of the depreciation. As previously mentioned depreciation is charged on the book value of the asset despite the fact of market value. There are cases where a student has done all the necessary calculation for the computation of amount but forgets to show it in further accounts.
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