Accounting And Its Effect On The Asset Of The Portfolio

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Depreciating assets over their useful lives, rather than just expensing them in the year they are acquired. When an asset such as new equipment is purchased by an organization, the seemingly obvious choice for reporting such an expense would be to record it entirely at the time of its purchase, and simply record income in the years following. This, however, is not the method used by accountants. Rather, they use a method of depreciating the asset. This basically means spreading the expense of the asset of the years of its useful life. This is the required method of accounting, according to the matching principle. This principle states that to record the entire expense the first year would skew the results of operations over the asset…show more content…
It is for this reason that the depreciation expense is taken and added to overall net income at the end of each subsequent year. This method 's use or value may not be apparent at first, but through its practice we see why this is the standard in regards to this area of financial reporting. Since the goal is to give the fairest representation of the financial position, at times adjustments such as these must be made. What equation describes the periodic inventory system? In a periodic inventory system, on hand items are tracked from time to time rather than continuously. This requires the company using the system to obtain a physical count at any time they must record the inventory. The equation used in this system takes the balance of the beginning inventory, plus all purchased items, and subtracting the ending balance. This formula determines the amount of inventory that was sold or used since the previous count was taken. For example, if a store hand a beginning inventory of 1,000 units, purchased an additional 4,000 units, and had an ending balance of 2,000 units, they have determined that 3,000 units were sold. The limitations of this system are that the company does not continuously know how many items are on hand, as well as the inability to know that one of the missing units was sold and not stolen, damaged, etc. This limits the company 's abilities in ordering additional stock due to low
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