Theory question 102
Depreciation2. (a) What is depreciation? (b) Explain three factors that are taken into consideration in determining annual depreciation charge (c) State two reasons for charging depreciation.
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(a) Depreciation is the part of the cost of a fixed asset charged against profit each year because of wear and tear, use, passage of time or obsolescence.
(b) Any three: cost of the asset (including costs of getting it ready for use); estimated useful life; estimated residual (scrap) value; the method of depreciation chosen.
(c) Any two: to match the cost of the asset with the revenue it helps earn (accruals); to show the asset at a fair value in the balance sheet; to keep back funds for replacement; to calculate profit correctly.
Define, list the inputs to the calculation, then the reasons.