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Our group's topic is accounting concepts related to depreciation, depletion, and amortization. Depreciation allocates the cost of a tangible asset over its useful life for tax and accounting purposes. It allows businesses to ascertain true profits, report accurate financial positions, replace assets, and save on taxes. Depletion allocates the cost of extracting natural resources by calculating the depletion expense based on units extracted over total estimated units. Amortization refers to paying off debt or allocating capital expenses of intangible assets over their useful lives, such as allocating loan principal payments over time or expensing a patent cost over its 15-year life.
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- 2. Aslam O Aliakum I am Fahad Abdullah & My Group Fellows Name are Arslan Ameen Muhammad Shuban Umair Khalid Shahbaz
- 5. Depreciation is an accounting method of allocating the cost of a Tangible Asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes. Depreciation = (Cost - Residual value) / Useful life What Is Depreciation?
- 6. 1-Ascertainment Of True Profits 2-Reporting Of True And Fair Financial Position Of a Business 3-Replacement Of Assets 4-Saving In Taxes Advantages Of Depreciation
- 7. When an asset is purchased, it is nothing more than a payment in advance for for the use of asset. Depreciation is the cost of using a fixed asset. To determine true and correct amount of profit or loss, depreciation must be treated as revenue expenses and debited to profit and loss account. 1-Ascertainment Of True Profits
- 8. 2 - R epo rt ing Of True A nd Fa ir Fina ncia l Po sit io n Of A Business The value of assets decrease over a period of time on account of various factors. In order to present a true state of affairs of the business, the assets should be shown in the balance sheet, at their true and fair values. If the depreciation is not provided then the asset will appear in the balance sheet at the original value. So, in order to show the true financial position of a business, depreciation is required to be charged on the assets.
- 9. 3. Replacement Of Assets Assets used in the business need to be replaced after the expiry of their useful life. Depreciation can be taken as a source of fund for replacing worn out asset by a new asset. Thus, depreciation charges help in accumulating funds for the replacement of an asset.
- 10. The profit and loss account will show more profits if depreciation is not charged on asset. So, the business needs to pay more income tax to the government. Depreciation charges on assets save the amount of tax equivalent to tax rate. Since it is shown as expense in the profit and loss account, it reduces the amount of the profit. 4. Saving In Taxes
- 12. Depletion is an Accrual Accounting technique used to allocate the cost of extracting natural resources such as timber, minerals and oil from the earth. Unlike depreciation and amortization. which mainly describe the deduction of expenses due to the aging of equipment and property, depletion is the actual physical depletion of natural resources by companies. WHAT IS DEPLETION Depletion Expense = Cost − Salvage Value × Number of Units ExtractedEstimated Number of Units
- 14. What Is 'Amortization? Amortization is the paying off of debt with a fixed repayment schedule in regular installments over a period of time for example with a mortgage or a car loan. It also refers to the spreading out of capital expenses for intangible assets over a specific period of time (usually over the asset's useful life) for accounting and tax purposes. A = payment Amount per period P = initial Principal (loan amount) r = interest rate per period n = total number of payments or periods Here are some things on which Amortization depends 1-Amortization of Loans 2-Amortization of Intangible Assets
- 15. AMORTIZATION OF LOANS On auto loan and home loan payments, at the beginning of the loan term, most of the monthly payment goes toward interest. With each subsequent payment, a greater percentage of the payment goes toward the loan's principal. For example, on a five-year $20,000 auto loan at 6% interest, the first payment of $386.66 allocates $286.66 to principal and $100 to interest. The last monthly payment allocates $384.73 to principal and $1.92 to interest.
- 16. AMORTIZATION OF INTANGIBLE ASSETS To illustrate the amortization of an intangible asset, imagine XYZ Biotech spends $30 million dollars on a patent with a useful life of 15 years. Theoretically, to account for the expense over a 15-year period, XYZ Biotech records $2 million each year as an amortization expense.