Business Accounting and Bookkeeping
Business Finance
Financial Statements

Why depreciation on an existing asset is always irrelevant?

Top Answer
User Avatar
Wiki User
Answered 2007-08-11 17:41:28

Depreciation is an invisible, non-cash cost and it is irrelevant when calculating the cash flow of the company which is the true indicator of whether the company is making a profit or not. Depreciation is also irrelevant because it is not truly realized until the asset is resold or scrapped at the end of its life. Recording it every year is consistent with the theory of conservatism when writing off costs. Depriciation is also irrelevant for the existing assets becoz it is fixed and fixed costs are always irrelevant unless they are incremental

User Avatar

Your Answer


Still have questions?

Related Questions

Can depreciation on a Fixed Asset be carried as a contra-asset on its own line on the balance sheet or does it have to be deducted from the Fixed Asset?

Depreciation of a Fixed Asset is always carried on the Balance Sheet in the Accumulated Depreciation Account (contra-asset). It is never deducted from the Fixed Asset.One reason for the Accumulated Depreciation account is that eventually, individual assets will be fully depreciated and their net values will be zero. If the depreciation were deducted from the asset, it would "fall off" the balance sheet. The accumulated depreciation account allows the assets to remain at book value in the asset account to maintain their visual presence on the books.The depreciation entry debits depreciation expense and credits accumulated depreciation.

Diminishing balance method?

Think along the lines of Compound Interest (but in reverse) For example- Asset of 100 depreciating by 20% p.a On Straight Line Year1 Asset 100 Depreciation 20 Year2 Asset 80 Depreciation 20 Year3 Asset 60 Depreciation 20 Year4 Asset 40 Depreciation 20 Year5 Asset 20 Depreciation 20 Year6 Asset 0 On Diminishing Balance Year1 Asset 100 Depreciation 20 Year2 Asset 80 Depreciation 16 Year3 Asset 64 Depreciation 12.8 Year4 Asset 51.2 Depreciation 10.24 Year5 Asset 40.96 Depreciation 8.192 Year6 Asset 32.77 .... and so on until the asset tends to 0 (will never technically reach 0)

Is depreciation expense an asset or liability?

Depreciation expense is neither an asset or liability. It is an expense.

The difference between the cost of an asset and the accumulated depreciation for that asset is called?

Book Value is the difference between the cost of an asset and the accumulated depreciation of that asset.

What is the treatment of accumulated depreciation and depreciation in the event of asset disposal?

When the asset is disposed of the Accumulated Depreciation is subtracted from the cost of the asset. Journal Entries: If Sold at a Profit: Dr Accumulated Depreciation (All Depreciation) Dr Bank/ Recievable (Amount received for Asset) Cr Asset (Carrying Value on Balance Sheet) Cr Profit on Asset Disposal (Balancing Figure) If Sold at a Loss: Dr Accumulated Depreciation (All Depreciation) Dr Bank/ Recievable (Amount received for Asset) Dr Loss on Asset Disposal (Balancing Figure) Cr Asset (Carrying Value on Balance Sheet) Please note there may also be current year depreciation

What is the double effect of depreciation?

When allocating depreciation, the two accounts affected will be an expense account - depreciation and a negative asset/contra-asset - accumulated depreciation. The journal entry would be: Dr Depreciation xxxx Cr Accumulated Depreciation xxxx This effectively raises the expense and decreases your asset. In the general ledger the depreciation account will be debited and the accumulated depreciation will be credited.

What is the purpose of depreciation expense and accumulated depreciation?

Depreciation expense reduce the cost of asset through income statement for the useful life of asset and accumulated depreciation account is contra account for asset account in balance sheet to show the total amount of depreciation charged.

If you start a new business usin existing machinery equipment you own can the fair market value of the equipment be used as asset value for depreciation?

Yes whenver old asset is utilized in business it is it's fair value which is used for depreciation purpose in business.

Is it correct to include depreciation of disposed of asset in income statement?

Depreciation of any asset is charged to income statement till the actual date of disposal of asset and after that date depreciation is not charged to income statement.

Formula for calculating straight line depreciation?

Formula for straight line depreciation is as follows: Depreciation = (Cost of asset - salvage value) / useful life of asset

Is accumalted depreciation a liability?

Accumulated depreciation is contra account to specific fixed asset to calculate the depreciation so that's why accumulated depreciation is shown in liability side or as a deduction from fixed asset.

Depreciation on Fixed Asset is a operating expenses or not?

Depreciation on Fixed Asset (Furniture, Building) are considered as Non-Current Assets

Does the Depreciation measure the actual decline in market value of an asset?

No. Depreciation is the process of allocating to expense the cost of a plant asset.

What is the journal entry for fixed asset depreciation?

(Debit) Depreciation account xxxx (Credit) Fixed asset account xxxx

What is entry for depreciation?

[Debit] Depreciation expense[credit] fixed asset.

What will be the journal entry of Depreciation?

debit depreciationcredit asset account

What is a depreciation entry?

[Debit] Depreciation xxxx [Credit] Asset xxxx

Why you use accumulated depreciation and not reduce depreciation from asset directly?

Basically the concept is to provide more detailed information and a method of checks and balances against the depreciation. The original acquisition cost of the asset is preserved this way and always appears until the asset is disposed. If you simply reduced the asset every year by the depreciation amount there would be less information for outsiders to understand why the asset keeps decreasing, or have the ability to distinguish whether you have new, low cost assets or a bunch of ancient assets which are almost completely depreciated.

What is the journal entries for disposal of fixed asset?

cr asset account for cost price dr accumulated depreciation for asset depreciation cr asset sale account dr/cr profit/loss on asset account

Is Accumulated Depreciation-Equipment an asset?

Accumulated depreciation-equipment is contra entry for asset account to show the reduction in actual assets cost through method of depreciation

How do you calculate straigt line depreciation?

Straigt line depreciation = (total cost of asset - salvage value)/ useful life of asset.

Which fixed asset their no charge depreciation?

Land is the only fixed asset which has no depreciation charge because land does not depreciate it's value.

What is journal entry for depreciation?

[Debit] Depreciation account [Credit] Asset account

What can be the conclusion for depreciation?

The calculating depreciation helps one to loss value in the asset.

Worth of fixed asset after depreciation?

definitely the worth of a fixed asset decreases after charging depreciation on it, because the efficiency of the fixed asset decreases with the every next financial year.