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What Everyone Ought To Know About Depreciation Report

Basics of the depreciation report

Depreciation is the decrease in value or usefulness of fixed assets which are used in a company’s operations over a specific period of time.It also refers to how the costs of assets are allocated over the time that they are used.

Some of the reasons for a depreciation report include:

  • Help determine the true profit of a company
  • To show a company’s true financial position
  • To show the assets at its reasonable value in the balance sheet
  • To allocate funds for the replacement of assets

There are also a number of factors that must be considered in charging the amount of depreciation including:

  • The assets original cost
  • The assets useful life
  • The assets scrap or residual at the end of its life
  • The method chosen for calculation of depreciation

The method used for calculating depreciation can affect net income as well as the balance sheet of a company and it is important to choose the method that best benefits the company, when you do budgeting assignment.

Calculating depreciation for a depreciation report

There are many different methods of depreciation calculation that can be used that will affect a company’s financial cash flow statement analysis. Regardless of the method used, total depreciation will be the same, but it will be allocated differently. Some common methods used for depreciation calculation include:

  • Straight line depreciation: Same depreciation is charged over the entire useful life of the asset. This method of calculating depreciation has the advantage of being easy to calculate. It is useful when economic benefits of an asset difficult to determine exactly. Straight line depreciation is well suited for depreciating assets such as buildings that provide a similar level of benefits during their useful life. However it might not reflect the true pattern of an asset’s economic benefits.
  • Reducing balance depreciation: Using this method the depreciation expense decreases at a constant rate over the life of an asset. It is a good choice of methods for assets with declining usefulness over the period of their life but the rate of depreciation selected can be somewhat biased.
  • Sum of the Year’ Digits Depreciation: The depreciation charge declines by a constant amount as the life of the asset progresses using this method. It is easier to understand the effect of decrease in depreciation expense compared to the reducing balance method but it is more difficult to calculate
  • Units of Activity Depreciation: Using the units of activity method the depreciation charge varies each period in proportion to the change in level of activity. This method most accurately reflects the pattern of consumption of economic benefits. This method is suitable for use in the case of fixed assets that depreciate in proportion to the units of activity rather than just the passage of time. A mold used in manufacturing may be expected to produce a certain number of units rather than to last a specific time.

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