Depreciation continues to be one of the most controversial, difficult, and impor

Question

Depreciation continues to be one of the most controversial, difficult, and important problem areas in accounting.
Required:
Explain the conventional accounting concept of depreciation accounting.
Discuss its conceptual merit with respect to (1) the value of the asset, (2) the amount(s) expensed, and (3) the discretion of management in selecting the method.
Explain the factors that should be considered when applying the conventional concept of depreciation to the determination of how the value of a newly acquired computer system should be assigned to expense for financial reporting purposes.
What depreciation methods might be used for the computer system?
Cite all references

Explanation / Answer

The dictionary meaning of the word depreciation is decrease or reduction. However, depreciation has a different connotation in accounting terminology. Accounting depreciation is described as that part of a tangible asset’s value which decreases through its useful life. The concept of depreciation is extremely important in financial accounting because it facilitates in upholding its basic assumptions, accruals and fair presentation. Moreover, depreciation affects the financial condition of an enterprise as well as its income for a specified accounting period.

The accumulated depreciation is offset against the value of a depreciable asset in financial statement. The current depreciation expense is deducted from the gross profit for determining the earnings of a business. Moreover, accounting depreciation affects both income statement as well as balance sheet.

The main role of deprecation is to maintain the accruals. Moreover, it affects the position of assets as well as the income of an entity over a particular period of time. In general, depreciation is the conventional technique for identification of capital expenditure over different accounting periods. Besides this, since land and current assets do not witness a decrease in value, emphasis is laid on the depreciable assets.

DEPRECIATION CONVENTION is utilized to determine how much depreciation to charge the first year when an item is bought part way through the year. Three different conventions are used: 1. Half year convention - All property placed in service is considered to be placed in service half way through the year. During the first year, half of the "normal" depreciation is taken. At the end of the depreciation period, the other half of the "normal" depreciation is taken; 2. Mid-quarter convention - If the amount of depreciation claimed on new items during the last 3 months of a year exceeds 40% of the total depreciation claimed during the year, then the mid-quarter convention is used. The amount of depreciation of each item is figured for one year then multiplied by 87.5% if was placed in service during Jan. - March, 62.5% if it was placed in service during April - June, 37.5% for items placed in service during July-Sept, and 12.5% for items placed in service during Oct. - Dec.; or, 3. Mid-month convention - All property is considered to be placed in service during the midpoint of the month. This requires some calculations.

methods might be used for the computer system

The simplest and most commonly used depreciation method, straight line depreciation is calculated by taking the purchase or acquisition price of an asset subtracted by the salvage value divided by the total productive years the asset can be reasonably expected to benefit the company (called "useful life" in accounting jargon).

References:-   

1) Accounting 24e Warren and Reeve

2) Google

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.