Finance Tips

Depreciation and Your Business

Depreciation is the systematic deduction of the worth of assets that are used in production. The assets are the capital investments a company makes to enable production of goods or services. They include equipments and machinery, vehicles, and buildings among others. They are not recorded as expenses. Because these are resources, they are assigned a useful life span. Based on an estimate of the life of an asset minus the salvage value, entities are allowed to distribute the worth of the asset over the period of use of the asset measured in years in most cases. What this means is that at the end of each year, the worth of the asset is deducted because it is no longer expected to as productive as it was at the beginning of the year. There are different methods of depreciation.

Straight-line Depreciation:

The straight-line depreciation method allows entities to calculate the worth of an asset and distribute an even deduction of the amount on a yearly basis over the life of the asset. In this case the cost of the asset minus the estimated salvage value divided by the estimated useful life of the asset. The salvage value is what the asset is expected to fetch when sold at the end of its useful life.

Straight-line depreciation can also be measured in units-of production. In this case, the cost of each unit is calculated and that cost is multiplied by the number of units produced in every given year and that amount is deducted as the depreciated value of the asset. In this case, the cost minus the estimated salvage value divided by the estimated total units to be made.

Accelerated Depreciation:

In the accelerated depreciation method the basic premise consists of depreciating a greater part of the value of the asset in the earlier life of the asset which would be reflected as a greater cost and less income in the financial statement. In this case, either the sum-of-the–years’ digits or the double-declining method is used. In this method, the annual depreciation expense is the cost minus the estimated salvage value and that is multiplied by the remaining life in years divided by the sum-of-the-years’ digits. Continue reading ‘Depreciation and Your Business’ »

The Unresolved Flaws in Financial Accounting

The users of accounting information include company owners, managers, investors, creditors, and government agencies. It is generally acknowledged that most financial reporting is “primarily externally oriented” and most of the users are nonaccountants who get frustrated trying to understand the statements. Since they are not part of the management team, they more or less are looking from the outside in.

Despite the many accounting associations from the Accounting Principles Board to the American Institute of Certified Public Accountants to the Financial Accounting Association that established the Financial Accounting Standards Board, there continues to be alternative ways of reporting which adds to the confusion and limitations of financial reporting. Continue reading ‘The Unresolved Flaws in Financial Accounting’ »