Question

Why are the costs of plant/long term assets recovered through depreciation vs. expensed out during the period purchased?

Choose one of the following depreciation methods to discuss: straight line, units of production, declining balance. Share how depreciation using this method is calculated and provide an example of when this would be the most ideal method for application.

Answer 1

Every long term/plant assets will be covered by deprication because, asset has its own useful life. once useful life is completed then the asset should be replaced with new asset.

Purchasing a new asset requires heavy funds.Using company funds in one year leads to lack of funds to company.Moreover depriciation is a deductable income from income tax.

Declining Method:Declining method is also called Written down method.Under this method in the intial years depriciation is high and later years will be less.A major portion of the aaset will depriciated in the starting years and will follow decreasing treand in the next comming years.

Calculation of Depriciation under decling method: In the first year deprication is calculated at a given rate and in the next year such asset value is decreased by  last years deprication amount.