Depreciation And Sale Of Asset Essay

959 words - 4 pages

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 expense Depreciation 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 benefit. There are three factors that contribute to this decline. They are, the deterioration of a non-current asset due to the use of it, technical obsolescence, whereby certain assets become out of date due to technical innovations and improvements on a comparative basis and the final, commercial obsolescence which is the process of certain non-current assets becoming redundant as the demands fall for the goods or service previously provided by the asset 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.There are two methods of depreciating an asset, the straight-line method, and the reducing balance method. The straight-line method of depreciation allocates the same amount of depreciation expense being charged against revenue each accounting period of the assets useful life. This method is effective for assets that give a constant contribution of revenue per period. It provides a direct relationship between the depreciation expense and the asset cost. The depreciation expense is calculated from the historical cost, less the residual value over the assets useful life. The historical cost is the purchasing price of the asset plus the costs which enable the asset to be set up ready for use and other cost of improvements that are made. The residual value is the expected net amount that is recovered from the disposal of the asset at the end of its useful life. The useful...

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