Depreciation and amortization

A Fined assets

A company's assets are usually divided into current  assets like cash and stock or inventory which will be used or concerted into cash in less than a year, and fixed assets such as buildings and equipment, which will continue to be used by the business for many years.

But fixed assets wear out- become unusable, or become obsolete -out of date, and eventually have little or no value. consequently fixed asset are  depreciated: their value on a balance sheet is reduced each year by a charge against profits on the profit and loss account. in other words, part of the cost of the asset is deducted from the profits each year.

The accounting technique of depreciation makes it unnecessary to charge the whole cost of a fixed asset against profits  in the year it is purchased. instead it can be charged during all the years it is used. this is an example of the matching principle

B Valuation

Assets such as buildings , machinery and vehicles are grouped together under fixed assets.

Land is usually not depreciated because it rends to appreciate, or gain in value. British  companies occasionally revalue -calculate a new value for- appreciating fixed asset like land and buildings in their balance sheets. the revaluation is at either current replacement cost- how much it would cost to buy new ones, or at net realizable value (NRV)-how much they could be old for. this is not allowed in the USA . apart from this exception appreciation is only recorded in countries that use inflation accounting systems

Companies in countries which use historical cost accounting - recording only the original purchase prince of assets - do not usually record an estimated market value -the price at which something could be sold today. the conservatism and objectivity principles support this, and where the company is going concern,  the market value of fixed assets is not important.

C. the most common system of depreciation for fixed assets is the straight-line method, which means charging equal annual amounts againts, profit during the lifetime of the asset (e.g deducting 10% of the cost of an assets value from profits every year for 10 years) many continental european countries allow accelerated depreciation: bussinesses can deduct the whole cost of an asset in a short time. accelerated depreciation allowances are an incentive to investement: a way to encourage it. For example, if a company deducts the entire cost of an asset in a single year, it reduces its profits, and therefore the amount of tax, is has to pay. consequently new assets, incluiding huge buildings, can be valued at zero on balance sheets. in britian, this would not be considered a true and fair view of the company's assets

9.1 March the words in the box with the definitions below. look at A and B apposite to help you                     

appreciate                    current assets                       fixed assets                

obsolete                       revalue                                   wear out

 1. to record something at a different price (revalue )

 2. assets that will no longer be in the company in 12 months' time  (current assets)

 3. to increase rather than decrease in value (appreciate).

 4. our of date, needing to be replaced something newer (wear out)

 5. assets that will remain in the company for several years (fixed assets )

 6. to become used and damaged (obsolete)

9.2 Match the nouns in the box with the verbs below to make Word combinations. Then use some of the word cominations to complete the sentences below. Look at A,B and C. opposite to help you.

Costs              fixed assets  market value

Profits                        value              purchase price

Deduct           profists                                  record    costs ,      value

Depreciate fixed assets                 reduce  market value    ,     purchase price                               

1-    Because we deduct  the profits , we don’t have worry about the market value of fixed assets.

2-    To depreciate fixed assets, we purchase price  part of their  reduce from profits each year.

3-    Because land usually appreciates, companies do not generally  depreciate  its value on the balance sheet.

9.3 March the two parts of the sentes. Look at B and C opposite to help you.

1. All fixed assets can appreciate it there is high inflation  R / A

2. Accelerate depreciation allows companies to  R / C

3. Fixes asserts  generally lose value, except for land, R / E

4. The straight- line method of depreciation R/B

5. Accelerated depreciation reduce companies tax bill, R/D

a. which usually appreciates

b. charges equal amounts against profist every year

c. remove some extremely valuable assets from their balance sheets

d. which encourages them to invest in new factories, etc.

e. but historical cost accounting ignores this.

by magaly  martinez, lucy aguilera and angela gutierrez...