Question

1.b Explain straight-line depreciation and give an example of an entry.

1.a What is amortization and when is that used?

Answer 1

1. Straight line depreciation is a one of the method of calculating the depreciation on assets of of business

Depreciation as per straight line method :-

Depreciation per year

= [(Capitalized value - salvage) ÷ estimated useful life of the asset]

For example, a business organisation bought an asset for cost = $1000 L, paid freight charges of $100 and estimated salvage value = $200 and asset having estimated useful life of 9 years

Calculation of depreciation using straight line depreciation method :-

Depreciation per year = [(capitalised value - salvage value) ÷ estimated useful life of the asset]

capitalised value has to be calculated by following international financial reporting standards (IFRS), as per IFRS, capitalised value of an asset includes cost incurred for acquisition of asset and expenses incurred till the asset is ready for use.

Hence, as per IFRS, freight charges has to include in capitalised value

= [($1100 - $200) ÷ 9 years] = $100 per year

Journal entries :-

Event	Particulars	Debit ($)	Credit ($)
On acquisition of asset	asset	1100
	To cash		1000
	To freight		100
Recording the depreciation of the asset for 1st year	depreciation	900
	To asset		900

2. the term depreciation is used for tangible assets and the term amortization is used for intangible assets

Amortization of intangible assets is process of expensing the cost of an intangible asset for the projected life of the asset. The amortization process for corporate accounting purposes may differ from the amount of amortization posted for the tax purposes. Intangible assets like patents, trademarks are expensive into amortisation account and the tangible assets like machinery and buildings are expensive into depreciation account.

amortization is used to allocate the cost of intangible assets over the useful life of the asset. Allocating the amortization expense over the useful life of the asset gives the accurate profit of an organisation generated in a particular accounting period.

to know the exact profit generated by the organisation in a particular accounting period the amortization expense is useful.

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