A. Explain the conventional accounting concept of depreciation accounting. Depreciation is described as a process of systematic and rational cost allocation. The depreciation process is depreciation base, useful service life, and depreciation methods. Depreciation accounting is a system of accounting that aims the distributed cost value to the less salvage value, other basic value of tangible capital assets, over the estimated useful life of a unit. It’s process of allocation and not valuation B. Discuss its conceptual merit with respect to:
i. the value of the asset - The depreciation base is the value of the asset that should be distributed over the expected useful life, the concept of depreciation is extremely important in financial accounting because it facilitates in upholding its basic assumptions, accruals and fair presentation ii. the charge(s) to expense- Depreciation is listed as an expense and will state the amount depreciate, which is used with P&L. This will occur over the life of the asset or until the principle amount / original value is recovered. The extreme depreciation methods would expense the whole asset when it is purchased or disposed of. Conventional accounting aims at expensing the asset over its useful life, thus dispersing the expense over many periods. This dispersion would help create consistency in the income statement, rather than causing huge, inconsistent spikes. iii. the discretion of management in selecting the method- Straight line depreciation is the most common method used. However, management has the option to select whichever method of depreciation best suits their business. Some managers prefer the accelerated method since, as an asset ages, the smaller depreciation charges are offset by higher maintenance charges, which give balance sheets valuations that are closer to the actual value of the asset.
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2011). Financial Accounting Theory and Analysis (10th...
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