There are four basic reasons for Depreciation. Those four reasons are
1. Wear & Tear of the Asset
2. Exhaustion
3. To Face Technological Obsolescence and
4. Accident
Showing posts with label Accounting. Show all posts
Showing posts with label Accounting. Show all posts
The value of the asset mainly depends upon the efficiency and economy; which gets affected due to the accident.
Read Full post!To replace the old machinery with new machinery before the expiry of the economic life period of the asset in order to maintain the efficiency and economy of the asset. The type writer was replaced by
the electronic typewriter during the yester periods of office automation. To replace the old type writer which is not efficient as well as economical, should be replaced by the new electronic typewriter through the depreciation charge on the old one
Nothing will be remaining due to the continuous extraction of resources. The resources in the oil wells, mine fields will become nothing due to continuous extraction should be replaced by new exploration. To invest on the new exploration in order to have continuous exploration which requires the depreciation as a charge against the revenues of the fields.
Example, Oil & Natural Gas Corporation Ltd. (ONGC) indulges in the process of new oil exploration projects through research projects. Then the new projects should be identified and invested by huge initial investment outlay through the current revenues out of the existing projects on account of replacement due to depletion ofresources.
The long term assets are becoming less efficient and poor quality in operations due to the continuous usage of the asset.
The depreciation accounting is mainly based on the concept of income. The concept of income is matching of revenues with expenses. The goods purchased are frequently matched through immediate sale or within a year. The crux of the concept of income is that the expenses are to be matched against the revenues.
The ultimate aim of matching is done in order to determine the volume of profit or loss of the transaction. If the assets are nothing but long term assets procured by the enterprise should be matched against the revenues of them. The matching of expenditure of the assets incurred by the firm at the time of purchase against the revenues is the hard core task of the firm. Why it is being considered as a cumbersome task in matching ? The benefits/revenues of the fixed assets expected to accrue for many number of years but not within a year. The
initial investment on the assets at the time of purchase should be matched against the revenue pattern of the same year after year in order to find out the profitability of the long term investment. To have an effective matching against the revenues on every year, the amount of purchase has to be stretched. The stretching of expenses into many years is known as depreciation.
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A system of accounting in which revenues are recorded when they are earned and outlays are recorded when goods are received or services are performed, even though the actual receipt of revenues and payment for goods or services may occur, in whole or in part, at a different time.
Read Full post!The stock in hand at the end of the accounting period is called as closing stock. Closing stock is to be prized at cost or market price whichever is lower.
Value of closing stock will always materialize on the credit side of trading account and on the assets side of balance sheet.
Final accounts are the channel of conveying the profitability and financial stance to management, entrepreneurs and interested outsiders of the business.
When a entrepreneur starts a business he desires to know the financial execution of his business. He can easily ascertain these by preparing the Final Accounts, which is prepared on the basis of the Trial Balance.
The preparation of Final Accounts is the last step in the accounting cycle and that is why they are called Final Accounts.
Final Accounts include the preparation of
1. Trading and Profit and Loss Account ; and
2. Balance sheet.
Final accounts have to be prepared periodically that to on yearly basis, Its done in order to make a continuous assessment of the business for a completed span. All the expenses and incomes for the full accounting period are to be taken into account for preparing Final Accounts.
Major adjustments used in Final Accounts:
Few important and widespread items, which need to be adjusted at the time of preparing the final accounts are discussed below.
1. Closing stock
2. Outstanding expenses
3. Prepaid Expenses
4. Accrued incomes
5. Incomes received in advance
6. Interest on capital
7. Interest on drawings
8. Interest on loan
9. Interest on investment
10. Depreciation
11. Bad Debts
12. Provision for bad and doubtful debts
13. Provision for discount on debtors
14. Provision for discount on creditors.
Real Account is a most important classification which highlights the real worth of the assets. This is the account principally deals with the transfer of assets.
It is an account which reveals the value and movement of the assets taking place in between the firm and also other parties due to any transactions.
The movement of the assets can be classified into two categories, i.e. the assets which are going out of the firm and the assets which are coming into the firm. The accounting treatment for this account is, "Debit what comes in, Credit what goes out."
"Debit what comes in, Credit what goes out."
Personal Accounts is an account which deals with a due balance either to or from these individuals on a particular period. It is an account normally reveals the outstanding balance of the firm to individuals. All the accounts which falls under this category have same kind of treatment and that is,
"Debit the Receiver, Credit the Giver."
Nominal account deals with the amount of incomes earned or expenses incurred. It takes in all expenses and losses as well as incomes and gains of the enterprise. Nominal account records the expenses and incomes which are not carried forwarded to near future. The accounting treatment for this account is,
"Debit all the expenses and losses, Credit all incomes and gains"
" Recording of transactions are only in terms of money in the process"
This is the concept tweaks the system of accounting as productive in recording the transactions and events of the enterprise only in terms of money.
The money is used as well as expressed as a denominator of the business events and transactions. The transactions which are not in the manifestation of monetary terms cannot be registered in the book of accounts as transactions. The transactions which are not in financial in character cannot be entered in the book of accounts.
Management Accounting mainly deals with internal reporting to the managers of a business unit. It narrates to planning, control, analysing and decision making which are helpful to the management in the discharge of its functions.
Management accounting highlights the control of decision making characteristics of accounting which is customised to suit the management needs and wants of a specific enterprise, rather than stewardship aspects of accounting.
It is ‘forward looking’ and usually includes cost accounting, financial accounting and budgeting. There is no stiff convention or accounting principles are used for preparing management accounting.
Matching Concept builds the entire accounting system as meaningful to agree on the volume of profit or losses of the firm at each and every level of transaction; which is an result of matching in between the revenues and expenses.
This concept smooth's the progress to recognize the value of the transaction at every moment. The value of the transaction is acknowledged through matching of profits which are mainly fetched from the total sales volume and the firms expenses at every level.
This accounting concept says natural life of business is infinity, it does not matter whether the owner of the business is alive or not but the business is long lasting for ever. This concept is also known as concept of long term assets.
Only because of this concept the depreciation is charged on original value of the asset but not on its realization value.
Read Full post!Financial accounting highlights the stewardship aspect of accounting significantly than the control or decision making aspects of accounting. Financial Accounting is described as origin for the creation of information and the continuous value of information.
After the creation of information, the developed information should be appropriately recorded.
There are three important function in financial accounting, they are:
1. Financial Transaction is only to be recorded,
2. Time relevance of the transaction at the moment of recording,
3. Methodology of recording the transactions- It contains two different systems of accounting, they are:
a. Cash system and
b. Accrual system
Every business transaction has two fold effect and recording of both pieces of a transaction is called double entry system of book keeping. There are two main approaches to examine the duality of the transaction and to find out whether the accounts to be debited or credited.
They are as under:
1. Accounting equation approach:
Assets = Liabilities + Capital
For Assets = Add debit and subtract the credit
For Liabilities & Capital = Subtract debit and Add credit
2. Traditional approach :
a. Personal account,
b. Real account, and
c. Nominal Account.
Duality or Double entry accounting concept represents the two sides of a single transaction. The law of entire business circumnavigates around only on mutual agreement sharing policy between the players.
The entire idea of business is predominantly conducted on mutual agreement between the parties from one occasion to another. This is being denominated into two different sides of accounting i.e. Debit and Credit. Therefore, Every debit transaction is appropriately compensated with the credit transaction.
For example: The total funds raised by the firm is equated to the total investments.
According to this convention, the intact status of the firm should be presented in detail manner without hiding anything; which has to deliver the required information to various parties involved in the process of the firm.
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