Explain briefly what you understand by the term “depreciation” as used by accountants. In what circumstances would straight-line be the most appropriate method to use for an asset? Give the following calculations: (i) the depreciation charge for 2019; (ii) the profit or loss on sale of the machine in 2023.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Raj Ltd purchased a machine on 1st January 2019 for ₤100,000. Transporting the machine to its
The machine was sold for ₤34,000 on 30th June 2023.
Required:
Explain briefly what you understand by the term “depreciation” as used by accountants. In what circumstances would straight-line be the most appropriate method to use for an asset? Give the following calculations:
(i) the depreciation charge for 2019;
(ii) the profit or loss on sale of the machine in 2023.
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