Question

Explain the process of establishing new accounts for fixed assets that will be depreciated like equipment. Why is accumulated depreciation set up with a negative beginning balance? What is the purpose of depreciation? What financial benefits does deprecation add to the organization?

Answer 1

Process of establishing new accounts : There is a detailed and sequencial procedure is available for categorizing each fixed asset and to depreciate its asset to which it is assigned. This process involves,

1.Assigning an asset class. Match the fixed asset to the company’s standard asset class descriptions. If you are uncertain of the correct class to use, examine the assets already assigned to the various classes, or consult with the controller.

2.Assigning depreciation factors. Assign to the fixed asset the useful life and depreciation method that are standardized for the asset class of which it is a part. This is automatically assigned in some computerized systems, where the assignment of an asset class automatically assigns a useful life and depreciation method to an asset.

3.To determine salvage value. Consulting with the purchasing or industrial engineering staffs to determine whether the asset is expected to have a salvage value at the end of its useful life. If this salvage value exceeds the company’s policy for minimum salvage values, make note of it in the depreciation calculation.

4.To create depreciation calculation. Create the depreciation calculation based on the useful life and depreciation mandated for the asset class using the asset cost less any salvage value. This is done automatically for assets entered into a fixed asset software package, but must otherwise be generated manually.

5.To print depreciation report. Print the depreciation report, sorted by asset class.

6.And the next procedure to create journal entry. Create the monthly depreciation journal entry, using the standard depreciation template. The standard entry is to record a debit for the depreciation expense (in total or by department), and to record a credit to the accumulated depreciation account for each asset class. This information comes from the totals on the depreciation report.

7.Entering the transaction. Record the journal entry in the accounting software.

8.File backup materials procedure. Attach the depreciation report to the journal entry form and file it in the journal entries binder.

Accumulated depreciation set up with a negative beginning balance : Credit balance is from Accumulated depreciation, because it aggregates the amount of depreciation expense charged against its fixed asset. This is the account is paired with the fixed assets line item on the balance sheet, so that the combined total of the two accounts reveals the remaining book value of the fixed assets. Over time,its the amount of accumulated depreciation will increase as more as depreciation is charged against the fixed assets, resulting in an even lower remaining book value

purpose of depreciation : The main purpose of depreciation is to match the cost of a productive asset to the revenues earned its from using the asset. Since it is very hard to see a link to revenues, the asset cost is usually allocated to the years in which the asset is used. Depreciation allocates or moves the asset's cost from the balance sheet to expense on the income statement over the asset's useful life.

Financial benefits does deprecation add to the organization : Depreciation expense helps companies better match asset uses with the benefits provided by an asset.

1.Matching Expense benefit

2.Asset Valuation benefit.

3. Cost Recovery benefit.

4. Tax Deducting benefit.