The purpose of providing depreciation on fixed asset is to ascertain true value of an asset, to replace asset, to ascertain correct profit or loss on sale of asset and to compute correct tax liability, etc.
What is the purpose of a depletion base?
The financial accounting term depletion base refers to the total cost associated with assets that are a natural resource too. The depletion base typically includes three costs: acquisition, exploration and development. This base is the value used when determining the company’s depletion expense.
What are the two objectives of providing depreciation?
Unless proper charge for this expense is made in accounts, the correct profit cannot be ascertained. (b) To show the assets at their proper values: Depreciation must be accounted for in order to show the assets at their proper values and thereby present a true and fair view of the financial position of the business.
What does it mean to have Depreciation Reserve?
Assets and Depreciation Reserve. Every asset that the company owns has its own depreciation reserve account. The yearly depreciation on the asset is added to the depreciation reserve account.
What’s the purpose of depreciation on an asset?
That is, a company is attempting to match the historical cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset. Since it is difficult to precisely match a productive asset’s cost to a company’s revenues, the asset’s cost is usually allocated to the years in which the asset is used.
What’s the difference between depreciation and percentage depletion?
Being similar to depreciation, depletion allows accounting for the reduction of the resource’s reserve. There are two main types of depletion calculation: cost depletion (where cost of the resource allocated over the period) and percentage depletion (the percentage of the property’s gross income where percentage is specified for each mineral).
How is depreciation related to the creation of revenue?
The type of depreciation that most closely links the creation of revenue to asset usage is the depletion method, which charges natural resources to expense as they are extracted. However, this option is not available for most types of fixed assets.
