MIDTERMS Flashcards
Define depreciation.
The decrease in the value of physical property with the passage of time.
The accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
Define value.
The present worth of all future profits that are to be received through ownership of a particular property.
Define market value of a property.
The amount which a willing buyer will pay to a willing seller for the property where each has equal advantage and is under no compulsion to buy or sell.
Define fair value of a property.
The value which is usually determined by a disinterested party in order to establish a price that is fair to both seller and buyer.
Define utility or use value of a property.
What the property is worth to the owner as an operating unit.
Define book value/depreciated book value.
The worth of a property after being deducted by the accumulated depreciation.
Define salvage or resale value.
The price that can be obtained from the sale of the property after it has been used.
Define scrap value.
The amount the property would sell for if disposed off as a junk.
2 reasons why we need to consider depreciation
- To provide for the recovery of capital which has been invested in physical property.
- To enable the cost of depreciation to be charged to the cost of producing products or services that results from the use of the property.
5 differences between market value and book value.
- MV depends on how much the market is willing to pay for it, BV is determined based on depreciation.
- MV may increase or decrease, BV will always decrease.
- MV is applicable to any type of property, BV is not applicable for land, gold, etc.
- MV is considered for valuation, BV is considered for account books in company.
- MV depends on supply, demand, development of area, etc., BV depends only on the passage of time and is not dependent on demand and supply.
Describe depreciation as business expense.
Depreciation is viewed as part of business expenses that reduce taxable income.
Illustrate asset depreciation concept. (Flow Diagram)
Depreciation
- Economic Depreciation - the gradual decrease in utility in an asset with use and time.
a. Physical Depreciation -due to lessening physical ability of a property to produce results (wear and tear)
b Functional Depreciation - due to the lessening of demand for the function the property was designed to render (obsolescence) - Accounting Depreciation - the systematic allocation of an asset’s value in position over its depreciable life.
a. Book Depreciation - used by corporation or business for internal financial accounting to track the value of an asset or property over its life.
b. Tax Depreciation - used by corporation or business to determine taxes due based on current tax laws of the government entity (country, state, province, etc.)
Gross Income - Expenses:
(Cost of goods sold)
(Depreciation)
(Operating Expenses)
____________________
Taxable Income
- Income Taxes
____________________
Net Income (Profit)
4 Factors to consider in Asset Depreciation
- Depreciable Life (how long?)
a. Physical life of a property - The length of time during which it is capable for performing the function for which it was designed and manufactured.
b. Economic Life - The length of time during which the property may be operated at a profit. - Salvage Value (disposal value)
- Cost Basis (depreciation basis)
- Method of Depreciation (how?)
Define depreciable property and give examples.
Depreciable property is property for which depreciation is allowed under federal, state, or municipal income tax laws and regulations.
Example: buildings, motor vehicles, equipment