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What does fully funded depreciation mean?
Fully funded depreciation means setting aside enough money or assets to cover the depreciation of an asset over its useful life. By fully funding depreciation, a company ensures it will have sufficient resources to replace the asset when it reaches the end of its useful life without incurring a financial burden.
How a company can manipulate its net income by estimating the longer estimated useful life and salvage value of the fixed assets?
Useful Life • Useful Life or Economic Life is the time period for machine is expected to operate efficiently. • It is the life for which a machine is estimated to provide more benefit than the cost to run it. Grouping of Fixed Assets Major groups of Fixed Assets: • Land • Building • Plant and Machinery • Furniture and Fixtures • Office Equipment • Vehicles No depreciation is charged for 'Land'. In case of 'Leased Asset/Lease Hold Land' the amount paid for it is charged over the life of the lease and is called Amortization. Methods of calculating Depreciation There are several methods for calculating depreciation. At this stage, we will discuss only two of them namely: • Straight line method or Original cost method or Fixed installment method • Reducing balance method or Diminishing balance method or written down method.Straight Line Method Under this method, a fixed amount is calculated by a formula. That fixed amount is charged every year irrespective of the written down value of the asset. The formula for calculating the depreciation is givenbelow: Depreciation = (cost - Residual value) / Expected useful life of the asset Residual value is the cost of the asset after the expiry of its useful life. Under this method, at the expiry of asset's useful life, its written down value will become zero. Consider the following example:• Cost of the Asset = Rs.100,000 • Life of the Asset = 5 years • Annual Depreciation = 20 % of cost or Rs.20,000Written down value method • Cost of the Asset = Rs. 100,000 • Annual Depreciation = 20% ? Year 1 Depreciation = 20 % of 100,000 = 20,000 ? Year 1 WDV = 100,000 - 20,000 = 80,000 ? Year 2 Depreciation = 20 % of 80,000 = 16,000 ? Year 2 WDV = 80,000 - 16,000 = 64,000 Illustration: Cost of an asset: Rs. 120,000 Residual value: Rs. 20,000 Expected life: Rs. 5 years Financial Statement Analysis-FIN621 VUCopyright© Virtual University of Pakistan 82 Calculate depreciation and the written down value of the asset for five years. Solution Straight line methodDepreciation = (120,000 - 20,000) / 5 = Rs. 20,000Particulars Depreciation (Rs) WrittenDown Value (Rs.) Depreciable costDep. Of the 1st year Dep. Of the 2nd year Dep. Of the 3rdyear Dep. Of the 4th year Dep. Of the 5th year (20,000) (20,000)(20,000) (20,000) (20,000) 100,00080,000 60,000 40,000 20,000 0Reducing Balance Method Under this method, depreciation is calculated on written down value. In the first year, depreciation is calculated on cost. Afterwards written down value is calculated by deducting accumulated depreciationfrom the cost of that asset(cost - accumulated depreciation) and depreciation is charged on that value. In this method, the value of asset never becomes zero. Consider the following example: Cost of an asset Rs. 100,000 Expected life Rs. 5 years Depreciation rate 20% SolutionParticulars Depreciation (Rs) AccumulatedDepreciation (Rs.) Written DownValue (Rs.) Depreciable cost Dep. Of the 1st year 100,000 x 20% Dep. Of the 2nd year 80,000 x 20% Dep. Of the 3rd year 64,000 x 20% Dep. Of the 4th year 51,200 x 20% Dep. Of the 5th year 40,960 x 20% 20,00016,000 12,800 10,240 8,19220,000 36,000 48,800 59,04067,232 100,000 80,000 64,00051,200 40,960 32,768 You see, at the end of five years, WDV of the asset is Rs. 32,768, not zero. But in case of straight line method, the WDV, after five years was zero. So, in the opinion of some people, reducing balance
What is the significance of working capital management to match sales and production?
If sales and production can be matched, the level of inventory and the amount of current assets needed can be kept to a minimum; therefore, lower financing costs will be incurred. Matching sales and production has the advantage of maintaining smaller amounts of current assets than level production, and therefore less financing costs are incurred. However, if sales are seasonal or cyclical, workers will be laid off in a declining sales climate and machinery (capital assets) will be idle. Here lies the tradeoff between level and seasonal production: Full utilization of capital assets with skilled workers and more financing of current assets versus unused capacity, training and retraining workers, with lower financing for current assets.
What are the assets and liabilities in English language?
Assets are things that a company or individual owns that have value, such as cash, inventory, equipment, and property. Liabilities are obligations that a company or individual owes to others, such as loans, accounts payable, and accrued expenses. Together, assets and liabilities make up the balance sheet of an entity.
Working capital formula?
The formula for calculating working capital is: Working Capital = Current Assets - Current Liabilities. It represents a company's ability to cover its short-term obligations with its current assets. A positive working capital indicates that a company has enough assets to cover its liabilities, while a negative working capital may suggest liquidity issues.
How do you Make A Lapsing Schedule of Fixed Assets?
To create a lapsing schedule of fixed assets, start by listing all fixed assets along with their acquisition dates, costs, and expected useful lives. Next, calculate the annual depreciation for each asset using an appropriate method (e.g., straight-line, declining balance) and determine the accumulated depreciation to date. Then, organize this information in a table format, showing the asset details, depreciation, and remaining value over time. Regularly update the schedule to reflect any disposals or additions to the asset list.
What is the normal balance of depreciation expense accounts?
The answer to this question depends on the value of the depreciable assets the company has, the useful lives of the assets, and the depreciation methods used. When a firm owns many depreciable assets, depreciation expense will be higher. The longer the useful lives of the assets, the less the depreciation expense will be per period because the expense is being allocated over a longer period of time. The depreciation method also has a huge impact. If the straight-line method is used, then the expense will be constant each period. If another method such as double-declining balance is used, higher depreciation will occur during the beginning of the life of the asset. All of these factors affect the balance of the depreciation expense account.
Does depreciation is charged on intangible assets?
Depreciation is charged to tangible assets while amortization is used to charge intangible assets.
Is Accumulated depreciation account is an expense account?
No. Accumulated Depreciation is a contra-account which appears on the asset side of the Balance Sheet. It is a credit balance account which reduces the value of Fixed Assets to reflect their declining value due to age and use. The normal offset to an entry to the Accumulated Depreciation account is a debit to Depreciation Expense.
Which depreciation method generates best applies to those assets that genrate greater revenue earlier in their useful lives?
Double- Declining- balance Method -MBA in Accounting Professor
What is the different between the cost of depreciation of a asset and its related accumulated depreciation?
Cost of depreciation assets and accumulated depreciation is same as accumulated depreciaton calculates how much depreciation is charged till date while remaining is current book value of assets.
Depreciation methods by law?
as per accounting standards issued by icai depreciation can be charged by following two methods 1)straight line method 2)written down value method but as per income tax act depreciation is allowed by way of wdv method.
So what is depreciation?
DEPRECIATION is the cost we consider expired already relative to the use of the thing (asset) or passage of time or obsolescence. This is computed in several ways e.g straight line , double declining, sum of years digit etc. but the most common is straight line. To understand it better we compute it this way using straight line: (Cost of an Asset - Salvage value) / life of an asset in years = annual depreciation. Salvage value is the estimated value at the end of assets life or simply the value this asset can still be disposed. It is something that causes property, whether it be a home or a car to lessen in value over time.
Fixed assets reduces profits in balance sheet?
depreciation of fixed assets reduces the profit as depreciation is also an expense.
Depreciation is provided on?
on Fixed Assets
What is included in the cost basis of a long lived asset?
Depreciation is the process of reducing the historical cost of an asset by an annual amount relating to the amount of asset usage. [ Most assets are recorded at historical costs by accounting departments; based on the type of asset, certain methods must be used to reduce the value of the asset each year. Depreciation affects the company financial statements, moving the depreciation amount from the asset value on the balance sheet to the depreciation expense on the income statement. GAAP Methods Several methods of depreciation are used to record the depreciation expense on the accounting books. The most popular methods include: Straight-Line: This is the simplest depreciation method; it is calculated by subtracting the asset salvage value from the asset's historical cost, then dividing the remaining amount by the useful years of the asset. This creates a constant amount for companies to depreciate each year. Declining Balance: The declining balance method is used for assets with shorter life spans for a company. This allows companies to deduct higher depreciation amounts early in the asset life and lower amounts as the asset is phased out of the company. Companies will usually determine what percentage of the asset will be used each year and multiply it by the asset value to determine annual depreciation. Units of Production: Manufacturing companies may use this method for assets used for production purposes only. It is calculated by subtracting the salvage value from the historical asset cost; this amount is then divided by the total unit production of the machine to get a per-unit depreciation amount. Each month, the units produced are multiplied by the per-unit depreciation amount to calculate the expense. Tax Method When calculating depreciation for U.S. tax purposes, all assets entered into service by a company after 1986 must use the Modified Accelerated Cost Recovery System (MACRS). The Internal Revenue Service (IRS) provides asset classes for companies to determine the useful life and asset salvage value for tax purposes.
What is the difference between amortization and depreciation?
Amortization usually refers to spreading an intangible asset's cost over that asset's useful life. Depreciation, on the other hand, refers to prorating a tangible asset's cost over that asset's life.Depreciation Is Applicable only on Fixed & Tangible Assets Which Depends on useful life of that assets that may be expected accurately but Amortization applicable on Intangible Assets whose life is very critical to be measured.DEPRECIATION is calculated for tangible assets while AMORTIZATION is calculated for intangible assets.
