Question

Outline the different treatments, options, methods and practices for recording and reporting expenses / deductions, benefits and depreciation

Answer 1

There are two main accounting methods used for record-keeping: the cash basis and the accrual basis. Small business owners must decide which method to use depending on the legal form of the business, its sales volume

CASH BASIS

Accounting records prepared using the cash basis recognize income and expenses according to real-time cash flow. Income is recorded upon receipt of funds, rather than based upon when it is actually earned; expenses are recorded as they are paid, rather than as they are actually incurred.

ACCRUAL BASIS

A company using an accrual basis for accounting recognizes both income and expenses at the time they are earned or incurred, regardless of when cash associated with those transactions changes hands. Under this system, revenue is recorded when it is earned rather than when payment is received; expenses are recorded when they are incurred rather than when payment is made.

Methods Of DEPRECIATION

Straight-Line - The basis of the asset deducted evenly over the asset’s useful life. Each year, the same amount of depreciation is claimed on a business’s tax return.

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What Are the Methods of Depreciation?

by Dana Griffin

Related Articles

• 1The Types of Depreciation Methods That a Company Could Use
• 2How to Choose a Depreciation Method
• 3Units-of-Production Depreciation Method
• 4The Advantages of Depreciation Expense

Depreciation is the process of allocating the cost of an asset over its life rather than all at once with regard to tax deductions and is used by both large and small businesses. The Internal Revenue Code describes the depreciation deduction as a reasonable allowance for the exhaustion, wear, tear and obsolescence of business assets. There are several methods of depreciation but only two that are widely recognized by the IRS.

Straight-Line

The straight-line method is most commonly used method for calculating depreciation because it is the simplest. It can be used for any depreciable property except for those that are required to use accelerated deprecation methods by the IRS. Under the straight-line depreciation method, the basis of the asset deducted evenly over the asset’s useful life. Each year, the same amount of depreciation is claimed on a business’s tax return. Under Generally Accepted Accounting Principles (GAAP), the straight-line method is used for internal books. In general, the formula for straight-line depreciation equals the asset's depreciable basis--the original costs to purchase it--divided by its estimated longevity.

Accelerated

method for recovering the cost of personal and real property that has a shorter useful life such, as a computer or automobile

Declining Balance ( WDV )

This method offers a higher rate of depreciation during the earlier years of an asset’s life.  Using the declining balance does not completely depreciate the asset.

Unit-of-Production Depreciation
This method provides for depreciation by means of a fixed rate per unit of production. Under this method, one must first determine the cost per one production unit and then multiply that cost per unit with the total number of units the company produced within an accounting period to determine its depreciation expense.
Double-Declining-Balance Method
The DDB method simply doubles the straight-line depreciation amount that is taken in the first year, and then that same percentage is applied to the un-depreciated amount in subsequent years.