financial accounting

1. NAME ABD UR RASHID

2.  In the United States, businesses can take a deduction for
depreciation. Depreciation is the reduction in an asset's
value caused by the passage of time due to use or abuse,
wear and tear. Depreciation is a method of cost
allocation. The cost allocation can be based on a number
of factors, but it is always related to the estimated period
of time the product can generate revenues for the
company, also known as the asset's economic life.
Depreciation expense is the amount of cost allocation
within an accounting period. Only items that lose useful
value over time can be depreciated. Depreciation can be
calculated in more than one way

3.  The simplest and most commonly used
method, straight-line depreciation is calculated
by taking the purchase or acquisition price of
an asset, subtracting the salvage value (value at
which it can be sold once the company no
longer needs it) and dividing by the total
productive years for which the asset can
reasonably be expected to benefit the company
(or its useful life).

4.  Example: For $2 million, Company ABC purchased a
machine that will have an estimated useful life of five
years. The company also estimates that in five years,
the company will be able to sell it for $200,000 for scrap
parts.
 Depreciation Expense
 = Total Acquisition Cost – Salvage Value / Useful Life
 Straight-line depreciation produces a constant
depreciation expense. At the end of the asset's useful
life, the asset is accounted for in the balance sheet at its
salvage value.

5.  Accelerated depreciation allows companies to write off their assets faster in earlier years
than the straight-line depreciation method and to write off a smaller amount in the later
years. The major benefit of using this method is the tax shield it provides. Companies
with a large tax burden might like to use the accelerated-depreciation method, even if it
reduces the income shown on the financial statement.
 This depreciation method is popular for writing off equipment that might be replaced
before the end of its useful life if it becomes obsolete ( computers, for example).
 Companies that have used accelerated depreciation will declare fewer earnings in the
beginning years and will seem more profitable in the later years. Companies that will be
raising financing (via an IPO or venture capital) are more likely to use accelerated
depreciation in the first years of operation and raise financing in the later years to create
the illusion of increased profitability (and therefore higher valuation).
 The two most common accelerated-depreciation methods are the sum-of-year (SYD)
method and double-declining-balance method (DDB):

6.  The DDB method simply doubles the straight-line depreciation amount
that is taken in the first year, and then that same percentage is applied to
the un-depreciated amount in subsequent years.
 DDB In year i = (2 / n) * (total acquisition cost - accumulated
depreciation)
 n = number of years
 Example
 For $2 million, Company ABC purchased a machine that will have an
estimated useful life of five years. The company also estimates that in five
years the company will be able to sell it for $200,000 for scrap parts.
 The double-declining-balance method produces a very aggressive
depreciation schedule. The asset cannot be depreciated beyond its salvage
value.