Depreciation Is a Very Important Essay

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Assumption include, but are not limited to, rate of depreciation, the method of depreciation, the useful life of the asset, and how much the asset will be worth after its useful life. All of these management has can manipulate either to their benefit or detriment in regards to financial reporting. Below are two commonly used methods of depreciation.

1) Straight line method of depreciation- This method uses an estimated salvage value which is then subtracted from the assets overall cost. The resulting value is then divided by the number of years management deems the asset will be used for. The company expenses the same amount of depreciation each year through this method.

2) Accelerated method of depreciation- This method expenses depreciation cost more quickly.

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Management generally uses this method purposely minimize taxable income. A popular method is the 'double declining balance', which essentially doubles the rate of depreciation of the straight-line method (Struik, 1987).

The depreciation of assets during partial years occurs when the asset is bought or sold sometime in the middle of the year. This also occurs if the company purchases an asset in the middle of an accounting month or quarter. To compensate for this annual depreciation expense is multiplied by a fraction that has the number of months the asset is expected to depreciate within numerator and the number of calendar months in the denominator. Depreciation expense is never exact. As such, it is appropriate to round to the nearest month in partial.....

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