Depreciation Calculation & Methods Essay: A Comprehensive Analysis Of Financial Strategies.

Formula for Depreciation

Depreciation plays a vital role in preparation of financials. The formula for calculation the depreciation is:

Depreciation = (Cost – Residual Value)/ Useful Life of the assets

So, for calculating depreciation for the first year, the following information is required:

Cost of assets – The major part for calculation of depreciation is to find out the cost for that asset. The cost of assets includes its purchase price and other costs incurred for use of the assets. These costs include the asset installation charges, taxed paid at the time of purchase or freight paid, etc.

Useful life of assets – Another important factor is to determine the useful life of the assets. This means the period up to which the benefits can be derived from that asset. As per the matching concept, the costs and revenue should be recognized in the same accounting period. So, the depreciation should be charged up to the period in which future economic benefits can be derived from that assets, i.e. its the useful life. 

Residual Value – This is the amount which will be received at the end of the assets life either in the form of scrap sale or reselling of that product. This amount is deducted from the cost of the asset to determine depreciation as it will be received at the end of the assets life. So, it will be wrong to depreciate this amount as well. 

Depreciation Method – After identifying the above factors, last factor is to decide as to which depreciation method should be used to depreciate the assets. The depreciation methods available are as follows: 

Straight Line Method – Under this method, the cost (net of residual value) is divided with the useful life of the asset. As per this method, the depreciation amount remains same over the life of the assets and the underlying assumption of this method is that the assets will give uniform benefits over its life. 

Written Down Value Method – Under this method the depreciation is charged on the carrying amount of the assets. Hence, the depreciation charge remains higher in the initial yeas and low in the remaining years. This method assumes that the benefits derived from the assets which keep on reducing with the age of the asset. And this method is most commonly used and popular method as it is more scientific than others. 

Units of Production Method – Another method is units of production method, under this method the depreciation is calculated in the following manner: 

Depreciation = (cost – residual value)/ Total unites estimated to be produced over the life * units produced during the period. 

This method should be used for the assets involved in the manufacturing as production units can be determined for them only. 

References:

Accounting-simplified.com. (2017). Units of Production Depreciation Method - Explanation and Examples. [online] Available at: https://accounting-simplified.com/financial/fixed-assets/depreciation-methods/units-of-production.html [Accessed 21 Sep. 2017].

Accounting, Financial, Tax. (2017). How To Calculate And Record Depreciation [of Fixed Asset]. [online] Available at: https://accounting-financial-tax.com/2009/04/how-to-calculate-and-record-depreciation-of-fixed-asset/ [Accessed 23 Sep. 2017].

Accounting-simplified.com. (2017). Methods of Depreciation | Accounting-Simplified.com. [online] Available at: https://accounting-simplified.com/financial/fixed-assets/depreciation-methods/types.html [Accessed 23 Sep. 2017]. 

Journal entries for the financial year 2015

Journal entries for the financial year 2015

The impairment loss is set off in the following manner:

(a) with goodwill to the extent available i.e. $1,200,000
(b) Remaining loss of $1,000,000 in the ratio of carrying amount of assets

Loss is not apportioned to customer list as it is assumed that it is recorded on NRV.