Question

a) Does the recognition of depreciation in the accounts provide a special "cash fund" for the replacement of fixed assets?Explain your answer.

b) Describe the nature of depreciation as it is used in accounting (what does it accomplish?).

c) Which types of assets are amortized? Give some examples.

d) Which types of assets are depleted? Give some examples.

Answer 1

a)

Depreciation is a non-cash expense, i.e., the company does not have to spend actual money like in case of other expenses.

It is used to distribute the cost of the asset over a period of time stating it a s wear and tear. Also, if it is an integral part in the functioning of the company.

Providing for Depreciation assists the company is taking a part of the revenue / profit and accumulating it in a fund over the course of the life of the old asset.

b)

Depreciation provides for funds for replacement of assets. Also, it appropriates the cost of the asset over the life of the asset, thus, not causing immediate burden on the income of the company in the year of purchase.

c)

Usually depreciation is a term used for tangible assets and Amortisation is a term used for Intangible Assets such as patents, copyrights, trademarks, etc.

d)

Assets in the nature of reserves are Depleted. Depletion is a method adopted by oil and gas businesses, petroleum, mining, timber businesses etc.