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3 Factors are : Present or purchase value of item (P)

Its scrap value at the end of its life-span (S)

The life span of the item considered (L) 2 Methods are

Straight line method

Diminishing value method Straight line method: A straight line would define all values during the life span.

The slope of the straight line = (P-S)/L

Y-axis intercept = P (at Time = 0)

Y value at end of life span = S

Diminishing Value Method A parabolic curve will connect P & S (instead of a straight line in the previous method) with the apex of the parabola tending to be at point S

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Q: Explain factors to be considered in determining the amount of depreciation to be recognized in each accounting period and the two common methods used to calculate depreciation?
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Related questions

When is revenue reconized in accurual accounting?

Revenue is recognized when it is incurred in accrual accounting while in cash based accounting revenue is recognized when actual cash is paid


When is Revenue is recognized?

Business Accounting


The revenue recognition principle dictates that revenue should be recognized in the accounting records?

The revenue recognition principle dictates that revenue should be recognized in the accounting records when it is earned.


Is depreciation expense a debit?

All expenses recognized in a period are debits. While depreciation expense is a debit (increase in expense) shown in the income statement, accumulated depreciation is usually the offsetting credit (contra-asset reduction in balance sheet).


The cost of fixed assets recognized as being consumed during a fiscal period is recorded as?

depreciation expense


Revenue is recognized when it is earned?

Generally, yes according to the accounting principle.


Which of the following are in accordance with generally accepted accounting principles?

the revenue recognition principle dictates that revenue should be recognized in the accounting records?


Different types of depreciation?

Net basisWhen a depreciable asset is sold, the business recognizes gain or loss based on net basis of the asset. This net basis is cost less depreciation.ImpairmentAccounting rules also require that an impairment charge or expense be recognized if the value of assets declines unexpectedly.[6] Such charges are usually nonrecurring, and may relate to any type of asset. Depletion and amortizationDepletion and amortization are similar concepts for minerals (including oil) and intangible assets, respectively. Effect on cashDepreciation expense does not require current outlay of cash. However, the cost of acquiring depreciable assets may require such outlay. Thus, depreciation does not affect a statement of cash flows, but cost of acquiring assets does. Historical costDepreciation is generally recognized under historical cost systems of accounting. Some proposals for fair value accounting have no provision for depreciation expense. Accumulated depreciationWhile depreciation expense is recorded on the income statement of a business, its impact is generally recorded in a separate account and disclosed on the balance sheet as accumulated depreciation, under fixed assets, according to most accounting principles. Accumulated depreciation is known as a contra account, because it separately shows a negative amount that is directly associated with another account. Without an accumulated depreciation account on the balance sheet, depreciation expense is usually charged against the relevant asset directly. The values of the fixed assets stated on the balance sheet will decline, even if the business has not invested in or disposed of any assets. The amounts will roughly approximate fair value. Otherwise, depreciation expense is charged against accumulated depreciation. Showing accumulated depreciation separately on the balance sheet has the effect of preserving the historical cost of assets on the balance sheet. If there have been no investments or dispositions in fixed assets for the year, then the values of the assets will be the same on the balance sheet for the current and prior year.


Fair value changes are not recognized in the accounting records?

historical cost principle


What is accrual accounting and cash accounting?

Accrual Accounting recognizes business transactions when they are occurred not when the related cash is received or a payment is made. Cash accounting is a completely opposite. In cash accounting transactions are recognized only when the related cash is received or paid.


How does depreciation generate actual cash flows for the company?

Depreciation does not generate cash flow. If a million dollar piece of equipment is purchased, an accountant would reflect that the company now owns a million dollar asset. Without depreciation, the company would still show a million dollar asset on the books even though we all know the equipment's value is decreasing. As such, the company's value would be overstated in the books. I found this from Wikipedia, so I believe the above answer should be modified. From Wikipedia - "Depreciation recognized for tax purposes will, however, affect the cash flow of the company, as tax depreciation will reduce taxable profits; there is generally no requirement that treatment of depreciation for tax and accounting purposes be identical. Where depreciation is shown on accounting statements, the figure usually does not relate to depreciation for tax purposes." - The above answer is correct. This is an additional point. Depreciation is a source of funds (not cash). Think about this - When you deduct depreciation from your profits, your net income figure gets reduced and if there is any distribution of cash which is based on net income, the amount of cash that is going out of the business will also be reduced. In that way, the company is able to retain part of its cash within the business that could have gone out, had the depreciation not been done. Additional comment - And even more to add regarding the taxes thing (at least in Canada). Depreciation is not an allowable expense for calculating taxable income. What happens is that you add the depreciation that you expensed back, but then you are allowed to take a deduction for capital cost allowance (at specified rates for the particular class of asset) to calculate taxable income. In the US it is a a legit expense and is typical done with straight line or MACRS. Additional comment - Regarding the first post: depreciation in accounting terms (amortization) is not meant to reflect the value of the asset. Rather, it is the gradual allocation of its cost to expense over its useful life. The fair market value of an asset may increase significantly over its original purchase price while at the same time its book value will decrease yearly due to depreciation. Strictly speaking, depreciation is a non-cash expense (no physical outflow of cash is involved). However, as mentioned above by others, it serves to reduce taxable income, which, in turn, reduces the income tax paid.


Revenue is properly recognized?

Revenue is properly recognized as an income at the end of an accounting period. Any form of money received is regarded as revenue.