Effects of depreciation policy.
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Effects of depreciation policy. by J. Frank Gaston

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Published by National Industrial Conference Board in [New York .
Written in English

Subjects:

  • Depreciation.

Book details:

Edition Notes

SeriesNational Industrial Conference Board. Studies in business economics -- no. 22., Studies in business economics (New York, N.Y.) -- no. 22.
The Physical Object
Pagination63 p.
Number of Pages63
ID Numbers
Open LibraryOL17774404M

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Tax depreciation refers to the depreciation expenses of a business that is an allowable deduction by the IRS. This means that by listing depreciation as an expense on their income tax return in the reporting period, a business can reduce its taxable income.   The type of depreciation you use impacts your company’s profits and tax liabilities. Accelerated depreciation methods, such as the double-declining balance method, generate more depreciation expenses in the early years of an asset’s life. As a result, the tax deduction for depreciation is higher, and the net income is lower/5(3). Definition of Book Depreciation Book depreciation is the amount recorded in the company's general ledger accounts and reported on the company's financial statements. This depreciation is based on the matching principle of accounting. Example of Book Depreciation. Deprecia­tion policy, in fact, relates to the choice of the method of depreciation and its suitability for the organisation. Various methods can be evaluated in the light of many factors, such as, effect of obso­lescence, repairs and maintenance, future operating efficiency of the asset in use, service cost of the asset, etc.

  Types of depreciation There are two main depreciation methods: book and tax. The book method is what you use to track your assets, accumulated depreciation, and depreciation expense, while the tax.   If depreciation is an allowable expense for the purposes of calculating taxable income, then its presence reduces the amount of tax that a company must pay. Thus, depreciation affects cash flow by reducing the amount of cash a business must pay in income taxes. Depreciation is a term used with reference to property, plant and equipment (‘PP&E’), whereas amortisation is used with reference to intangible assets. Depreciation of PP&E is governed by whereas amortisation of intangible assets is set out in IAS Depreciation Accounting Policies. Depreciation is the expired or used portion of a fixed asset during an accounting period. This is taken into account to achieve the .

Now, as the book value of the asset reduces every year so does the amount of depreciation. Accordingly, higher amount of depreciation is charged during the early years of the asset as compared to the later stages. Thus, the method is based on the assumption that more amount of depreciation should be charged in early years of the asset.   The revised depreciation estimate is calculated as follows: Depreciation estimate = (Cost - Salvage Value) / Useful Life Depreciation estimate = (72, - 16,) / 8 Depreciation estimate = 7, Notice that the remaining net book value has been substituted for the cost in the depreciation formula. The depreciation estimate is now 7, per year.   By charting the decrease in the value of an asset or assets, depreciation reduces the amount of taxes a company or business pays via tax deductions. A .   Since depreciation is an expense, it has a direct effect on the profit that appears on a company's income statement. Profit, or net income, is all of the company's revenues minus the cost of doing business, which can include expenses, interest, taxes and depreciation.