Accounting Depreciation: Methods, Analysis, and Recommendations Report

This report delves into the concept of accounting depreciation, explaining its role as a method for allocating the cost of tangible assets over their useful lives. It explores various depreciation methods, including the straight-line, diminishing value, and annuity methods, providing a detailed analysis of each. The report highlights the advantages and disadvantages of each method, drawing upon literature reviews to support its arguments. Through a comparative analysis, the report recommends the written-down value method as the most suitable approach for organizations, emphasizing its ability to equalize charges over time and align with asset efficiency. The study concludes that depreciation is a crucial non-cash expense impacting financial statements and is accepted by various legal and financial institutions. The report emphasizes the importance of depreciation in determining asset selling prices and its impact on tax deferral and cash flow. References from various books and journals are included to support the analysis.

ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................1
LITERATURE REVIEW ...............................................................................................................1
DISCUSSION .................................................................................................................................2
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
With reference to accounting depreciation is explained as decrement in cost of specific
fixed asset in systematic aspect until asset's value becomes negligible and zero. In simple words,
it is accounting method which is used for allocating tangible asset's cost over its useful life and
accounted for value declining. Accounting helps in estimating value decrement with application
of information on basis of asset's useful life. It is an accounting convention which helps for
allowing organization for writing off its value of asset. Generally, business's depreciate assets for
long term for accounting and tax objective as well. The allocation of cost is on basis of numerous
factors related to period which is estimated as product could be able for generating revenue for
economic life or organization. The expense of depreciation is refereed as allocation amount
within specific accounting period. Depreciation could be calculated by three methods such as
straight line, diminishing value and annuity method. The present report will give brief discussion
about depreciation along with its method and on the similar aspect critical analysis will be
presented. This report will give discussion about what method should be adopted in this present
scenario for accomplishing its objectives.
LITERATURE REVIEW
According to Srinivas and Khan (2017), straight line method is considered as simplest
method for giving depreciation as it could be easily understood by layman as it is equal or fixed
instalment depreciation method. It is appropriate for assets which are operating in consistent and
uniform aspect over life. Every year same amount will be depreciable and less expensive as well.
On the contrary, Holley (2018) has stated that various pieces of equipments of office, other items
and machinery purchased does not perform in similar aspect in each year as age of asset becomes
inefficient. SLD does not account efficiency loss and increment in expense of repair over year
which is not appropriate for expensive assets like plant and equipment.
According to Marais, Wecker and Weil (2017), high depreciation is charged in prior
years as it accounts about efficiency of asset and is very realistic method for extracting
depreciation. In the similar aspect, machine has need of fewer repairs and by passing year cost of
repair is increasing day to day as this method always charge more depreciation and less in late
years which ensures about aggregate of repair cost along with depreciation in same year.
However, Caballero, Farhi and Gourinchas (2017), had stated that depreciation rate is fixed with
absence of following formula of subjectivity in fixed rate of depreciation which becomes high.
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The asset's value will never become zero in its accounts even if assets are not used in
organization.
According to Kuter and et.al. (2018), annuity method undertakes interest on invested
capital in asset is accounted. This method is considered as precise and exact with reference to
calculations as it is scientific method. On the contrary, Panadiy (2018) has stated that this
method has various complexities as burden of income statement increases with time passage
where depreciation amount is charged in every year which is constant. The interest amount is
credited which always diminish by passing year and its major consequence being net burden of
income statement grows in huge aspect in each year. The asset has huge requirement of frequent
extensions along with additions, so calculations are altered in frequent aspect which is
inconvenient.
DISCUSSION
By this secondary research, it had been assessed that written down value method is used
as higher rate and gives fair value of asset in present year as it calculates fixed percentage on
actual cost in first year. The higher percentage is required for decreasing asset to disposable
value in specified duration due to fixed depreciation rate or along with diminishing balance of
asset rather than its original cost which was performed in SLM's depreciation. It had been
articulated that its problem on basis of obsolescence of asset as major contribution of
depreciation charged in earlier years. It is also recognised through different tax authorities with
legal bodies as well. It is beneficial as equal burden on account of profit and loss of depreciation
and expenses of repair are accounted in each year (Demski, 2017).
While assessing method of depreciation along with their drawbacks it had been suggested
that organization must adopt written down value method for calculating depreciation as it
equalizes aggregate of charges which are using asset through year to year as it is replicated as
equitable as compared to straight line method. The main reason behind this charge of
depreciation decreases every year where charges of repair raise in each year. It is also beneficial
for business entity because it matches asset's service along with charge of depreciation as assets
are highly efficient in initial year. It is fair with context of different fixed assets. The most
important aspect about outcome in better cash flow via tax deferral in this method as net profit is
directly taxed lower in initial years which is huge in subsequent years. In case additions are
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formed in asset then there is no need of fresh calculations along with recognition of income tax
authority as well (Prion, 2017).
It has been assessed that this method is very important as it considers comprehensive
value of asset's about organization. The depreciated assets starts on books at specific purchased
price which are sold before they are depreciated as 0. The asset's depreciated value is very
important as it identifies asset's selling price (Libby, 2017).
CONCLUSION
From the above study it had been concluded that depreciation is referred as non-cash
expense which will not give outcome of outflow of cash and it is directly debited to income
statement as it shows appropriate measurement on income along with original financial position.
It had been articulated that it is appropriate for expensive assets like plant, machinery, vehicles
such as lorry etc. where repairs are given heavily weigh along with residual value as well. This
study has shown that depreciation is acceptable by various legal authorities such as income tax
and financial institutions as well.
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REFERENCES
Books and Journals
Caballero, R.J., Farhi, E. and Gourinchas, P.O., 2017. Rents, technical change, and risk premia
accounting for secular trends in interest rates, returns on capital, earning yields, and factor
shares. American Economic Review. 107(5). pp.614-20.
Demski, J. S., 2017. Accounting and economics. The new Palgrave dictionary of economics.
pp.1-6.
Holley, K.A., 2018. The Role of Threshold Concepts in an Interdisciplinary Curriculum: a Case
Study in Neuroscience. Innovative Higher Education. 43(1). pp.17-30.
Kuter, M. and et.al., 2018. Asset Impairment and Depreciation before the 15th
Century. Accounting Historians Journal. 45(1). pp.29-44.
Libby, R., 2017. Accounting and human information processing. In The Routledge Companion
to Behavioural Accounting Research (pp. 42-54). Routledge.
Marais, M. L., Wecker, W. E. and Weil, R. L., 2017. Statistical Estimation of Incremental Cost
from Accounting Data. Litigation Services Handbook: The Role of the Financial Expert.
pp.1-26.
Panadiy, O., 2018. Influence of Parameters of Agricultural Enterprises Activity on the
Organization of the Managerial Accounting. Accounting and Finance. (2). pp.31-36.
Pilcher, R., 2018. Depreciation in local government—still the problems continue. In Public
Sector Accounting, Accountability and Governance (pp. 30-42). Routledge.
Prion, W., 2017. Depreciation and Inflation 1. In Replacement Costs and Accounting Reform in
Post-World War I Germany (pp. 2-3). Routledge.
Srinivas, Y. and Khan, M.A.A., 2017. A Conceptual Analysis of Accounting for Depreciation
using Component Wise Approach-Indian Perspective. Sumedha Journal of
Management. 6(1). pp.78-102.
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