Question

You are a CPA. The owner of a landscaping business, Larry Shrout, who is one of your clients, asks you to explain:

(i) the general concept of depreciation; and

(ii) the specific difference between straight-line and declining - balance deprecation.

Write a letter to the client responding to these inquiries. Your response should include, at a minimum: An introductory, explanatory, and concluding paragraph Appropriate salutations Sufficient supporting information and/or examples to effectively respond to the inquiry.

Answer 1

Madarsha ,CPA

Hyderabad, TS.

Pin : 500034.

To

Larry Shrout,

Florida,

32013.

Dear Mr.Larry Shrout,

In responce to your query , we would like to share requested details of concept of depreciation and their specific differences mentinoed below.

1) Depreciation:

A firm requires fixed assets such as plant and machinery,building and furniture etc for its necessity which is purchased and it is recorded in the books of account at its original cost.A fixed asset is used to earn revenue for a number of accounting period in future with the same cost until the asset is sold or discarded.

Therefore,it is necessary that a part of the original cost of the fixed asset will be treated as an expense in each accounting year.A part of the original cost which will be treated as an expense is known as depreciation in accounting.Depreciation is an important expense for a firm which must be charged in the statement of profit and loss account before getting the net profit for that particular year.

2)Specific difference between straight-line and declining - balance deprecation :

a) The depreciation amount provided on the asset using Straight Line Method is constant every year throughout the lifetime of the asset. Under Diminishing Balance Method,The depreciation amount provided on the asset is not constant every year but the percent of depreciation is constant

b) In Straight Line Method ,The value of the asset becomes zero or nill at the end of the lifetime of the asset. while The value of the asset never become zero at the end of the lifetime of the asset in Diminishing Balance Method,

c) Under Straight Line Method ,The depreciation amount of the asset stays same for all the years of lifetime of an asset.Under Diminishing Balance Method,The depreciation amount of the asset is higher in the earlier years and become lesser in the later years.

I hope this information Addresses your needs, if you require further clarifications, please contact us any time.

Thank you for considering us to be your partner.

Thanks & Regards,

Sk Madarsha,CPA.