The correct option is 2. Amortization. Depreciation in spirit is similar to Amortization because both depreciation and amortization have the same characteristics except that depreciation is used for tangible assets and amortization for intangible assets. To make it clear, intangible assets are thoseRead more
The correct option is 2. Amortization.
Depreciation in spirit is similar to Amortization because both depreciation and amortization have the same characteristics except that depreciation is used for tangible assets and amortization for intangible assets.
To make it clear, intangible assets are those assets that cannot be touched i.e. they are not physically present. For example, goodwill, patent, trademark, etc. Hence, these assets are amortized over their useful life and not depreciated.
Example for Amortizing intangible assets: A manufacturing company buys a patent for Rs 80,000 for 8 years. Assuming that the residual value of the patent after 8 years to be zero.
The depreciation to be written off will be
Yearly Depreciation = Cost of the patent – Residual value / Expected life of the asset.
= 80,000 – 0 / 8
= Rs 10,000 every year.
Whereas, tangible assets are those assets that can be touched i.e. they are physically present. For example, building, plant & machinery, furniture, etc. Hence, these assets are depreciated over their useful life and not amortized.
Example of Depreciating tangible asset: A manufacturing company bought machinery for Rs 8,10,000 and its estimated life is 8 years, scrap value being Rs 10,000.
The depreciation to be written off will be
Yearly Depreciation = Cost of machinery – Scrap value / Expected life of the asset.
= 8,10,000 – 10,000 / 8
= 8,00,000 / 8
= Rs 1,00,000 every year.
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You must have knowledge of what depreciation is. Depreciation is the process of allocating the value of an asset over its useful life. It reduces the carrying value of the asset year by year till it is scraped. It is an expense (expense of using the asset for business purposes) and it is charged toRead more
You must have knowledge of what depreciation is. Depreciation is the process of allocating the value of an asset over its useful life. It reduces the carrying value of the asset year by year till it is scraped.
It is an expense (expense of using the asset for business purposes) and it is charged to profit and loss account.
Depreciation can be reported in the financial statement in two ways:
Provision for depreciation account represents the collection of total depreciation till date on an asset. That’s why it is also called accumulated depreciation account. When an asset is sold, its accumulated depreciation is credited to the asset account. See the journal entry below:
It is shown on the liabilities side of the balance sheet. It is a nominal account because it is shown as an expense in the statement of profit or loss.
In case provision for depreciation account is not maintained then the balance sheet looks like this:
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