Question

In: Accounting

Assume that you are the accountant for Computer Consultants. Prior to this year, Computer Consultants operated...

Assume that you are the accountant for Computer Consultants. Prior to this year, Computer Consultants operated out of a leased office. However, the company purchased its own office building this year. The building is in an area where real estate values have been increasing an average of 6 percent per year.

The owner of Computer Consultants has asked why you recorded depreciation on the building if real estate values are appreciating. How would you explain this?

Solutions

Expert Solution

Being the accountant of Computer Consultants, it is bring to their notice that depreciation of building is provided in books of accounts as Computer Consultant has become the owner of the asset. And depreciation is provided for providing the loss the of normal wear & tear, in accordance with the method used. Whether SLM or WDV.

As far as Appreciation in value is concerned, this does not affect the books of account as assets are recorded at their book values and appreciation is ignored for the purpose of accounts.The reason for ignoring depreciation is that prices of real estate may at times increase or decrease.That is they are fluctuating.And while preparing books of account one has to be prudent, that is accountant has to identify all the possible losses & should not record the gains.

Whereas permanent increase in value of asset can be recorded by revaluating the asset so as to show true & fair nature of Financial Statements.

Thus it is necessary to record depreciation on real estate even if its values are appreciating.

Please give your feedback!! Happy Learning :)

ekkarill92 answered 2 years ago
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