Question

When company buy a tangible asset, its value decreases over time. Some decrease more quickly than others. This is something you'll probably come to realize when you try to re-sell the item—in most cases, you won't get the same price you originally paid. This is called depreciation. If you manage a business, you can claim the value of depreciation of an asset as a tax deduction.
what is the best method to calculate this value? Why?

The concept of depreciation is consistent with the going concern as assumption. Explain

Answer 1

Answer.

Depreciation is a tax-deductible business expense. It offers businesses a way to recover the cost of an eligible asset by writing off the expense over the course of its useful life. A business can expect a big impact on its profits if it doesn't account for the depreciation of its assets.

To account for a tax deduction, a company has several different options available under generally accepted accounting principles (GAAP) to calculate how much an asset depreciates:

• Declining Balance: In this method, larger depreciation expenses are recorded during the earlier years of an asset’s life while smaller expenses are accounted for in its later years.
• Double-Declining: Using this method means that assets depreciate twice as fast as the traditional declining balance method. It also accounts for larger depreciation expenses during the earlier years of an asset’s life and smaller ones in its later years.
• Sum-of-the-Years’ Digits: To calculate depreciation using this method, the asset's expected life is added together. Each year is then divided by that figure starting with the higher number in the first year.
• Units of Production: Companies benefit from greater deductions when they use this method. That's because the value of an asset is related to the number of units it produces rather than how many years it's used.
• Straight-Line Method: This is the most commonly used method for calculating depreciation. In order to calculate the value, the difference between the asset's cost and the expected salvage value is divided by the total number of years a company expects to use it.

The Straight-Line Method - The Best Method to Use

As mentioned above, the straight-line method or straight-line basis is the most commonly used method to calculate depreciation under GAAP. This method is also the simplest way to calculate depreciation. It results in fewer errors, is the most consistent method, and transitions well from company-prepared statements to tax returns.

Depreciation using the straight-line method reflects the consumption of the asset over time and is calculated by subtracting the salvage value from the asset's purchase price. That figure is then divided by the projected useful life of the asset.

Here's an example. Say a catering company purchases a delivery van for $50,000. The expected salvage value is $10,000 and the company expects to use the van for five years. By using the formula for the straight-line method, the annual depreciation is calculated as:

($50,000- 10,000) ÷ 5 = $8,000.

The Going Concern Principle : The going concern principle is the assumption that a business will continue to exist in the near future, in other words, that it will not liquidate or be forced out of business.
As an accounting principle, the going concern principle serves as a guideline which allows readers of a business’s financial statements to assume that the business will continue to operate long enough to carry out its current obligations, objectives and commitments.

An example showing the application of the going concern principle is the calculation of depreciation of assets. This depreciation calculation is based on the expected economic life of the asset, as opposed to its current market value.

Businesses assume that they will continue operating for an indefinite period of time, and that their assets will therefore be used in the business until they have fully depreciated.