Theory question 102
Depreciation2. (a) List and explain three factors that would be considered in the computation of the annual depreciation amount of any given fixed asset (b)(i) What is the difference between depreciation and amortization? (ii) Give two examples each of assets associated with depreciation and amortization.
Show the model answer
(a) Any three: cost of the asset (purchase price plus costs of getting it ready for use); estimated useful life (the number of years it will be used); estimated residual (scrap) value at the end of its life; the method of depreciation chosen (straight line, reducing balance, etc.).
(b)(i) Depreciation is the spreading of the cost of a tangible fixed asset over its useful life as it wears out or becomes obsolete; amortisation is the same process applied to intangible assets (or leases) over the period of the right.
(ii) Depreciation: plant and machinery, motor vehicles, furniture and fittings, buildings. Amortisation: goodwill, patents, copyrights, trademarks, leases.
Depreciation is for things you can touch; amortisation is for rights and other intangible assets.