HELP University Question on Depreciation

Banned 4 replies
Found 11th Nov 2007
Doing my University work.
And i'm stuck as to what this question means:

'What is the purpose of providing for depreciation?'

Any help thanks

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Well, very briefly (just to get you going), things start depreciating in value as soon as you buy them (e.g. a new car), and they keep depreciating year on year.

If you are doing you company accounts then you need to be reflecting the real worth of the company, so it's no good saying you have £20,000 worth of car on your books when it's only worth £10,000.

Over-inflating the worth of item will also cause problems when you come to replace it - if you say your car is still worth £20,000 when it's real value is £10,000, then when you sell it your company takes a massive £10,000 hit on its profits for that year. Far better to spread the £10,000 loss over a few years.

There are other reasons (e.g. you can use deprecition to 'remind' you when it's time to replace an item), but the 2 I've given you here should be enough to get you thinking.

Original Poster Banned

cheers mate

No problem:thumbsup:

cis_groupie

Well, very briefly (just to get you going), things start depreciating in … Well, very briefly (just to get you going), things start depreciating in value as soon as you buy them (e.g. a new car), and they keep depreciating year on year. If you are doing you company accounts then you need to be reflecting the real worth of the company, so it's no good saying you have £20,000 worth of car on your books when it's only worth £10,000.Over-inflating the worth of item will also cause problems when you come to replace it - if you say your car is still worth £20,000 when it's real value is £10,000, then when you sell it your company takes a massive £10,000 hit on its profits for that year. Far better to spread the £10,000 loss over a few years.There are other reasons (e.g. you can use deprecition to 'remind' you when it's time to replace an item), but the 2 I've given you here should be enough to get you thinking.



That's really well esplained. If it's OK, I'd just add that for day-to-day puposes, the second reason is the more important of the two, as it helps in planning annual budgets.

Of course, the hardest part is deciding on which method of depreciation to use. Each has its good points & bad points, so you need to think carefully about it - the usual way to decide is to decide what method others are using for the type of item you're depreciating. The 2 most commonly used methods are straight line depreciation & reducing balance depreciation.


Don't forget to discuss the causes of depreciation (roughly, these are physical, economic, time & depletion).

There, you should now have enough information to search for all that you need to do for your assignment.
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