Straight Contra
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Straight Contra

DEPRECIATION AND ITS FINANCIAL IMPORTANCE
DEPRECIATION AND ITS FINANCIAL IMPORTANCE
Depreciation is the method through which the usage of a noncurrent asset is recognized; it is the annual reduction of the value of a property, plant or equipment. It simply states that as an asset is being “used” during the day to day operation process of a company, a part of its costs should be deducted from the revenues that were at the same time generated by “using” it; this way applying the matching principle of accounting. This depreciation value is registered in each fiscal year, working as a “contra asset” in the Balance Sheet (since it subtracts an amount from the value of the asset).
There are several methods to calculate de depreciation value of noncurrent assets, which can be divided into two groups: Straight-Line Depreciation and Accelerated Depreciation. One of the most commonly applied methods is the Straight-Line Depreciation Method, which consists in assuming that the amount of value an asset will lose will be equally the same each year. To apply this method, three aspects have to be taken into consideration: the cost of the asset, the estimated salvage value and the estimated useful life (measured in number of years). This annual value is calculated by the following formula:
Annual Depreciation = Cost of Asset – Estimated Salvage Value / Estimated Useful Life of Asset
Another very useful method is the Double Declining-Balance Depreciation (part of the Accelerated Depreciation methods), which consists in doubling the percentage of the depreciation rate obtained through the Straight-Line Depreciation method. So for example, if the Depreciation Rate is 10%, the Double Declining-Balance method will use 20%. This rate goes into the following formula:
Annual Depreciation = 2 x Straight Line Depreciation Rate (or just double) / Net book value of Asset at the beginning of year
Contrary to the Straight-Line method, this formula will result in a different depreciation expense value each year, given to the fact that the Net Book Value of the asset decreases as Accumulated Depreciation is subtracted annually as reflected on the Balance Sheet.
Calculating the depreciation value of an asset and reflecting it on the Balance Sheet of a company, is not the only important aspect of this concept. Being that Depreciation is an expense, another financial statement has to be taken into consideration: The Income Statement. When a company registers a depreciation value, it is registering the expense of “using” or spending assets into its Income Statement, therefore directly affecting its Net Income. The more a company uses its assets, the more they generate income, but the more they are spent also; which implies a higher depreciation expense, decreasing the end result of the operation, in other words, decreasing the final revenue.
The main difference and importance between which category of Depreciation Method needs to be applied is that, with Straight-Line Depreciation there is a lower depreciation expense in the first years of the asset, allowing a higher net income that results in higher revenues for its stockholders. With Accelerated Depreciation, on the other hand, the expense is bigger in the beginning resulting in less Net Income, but it later decreases as the Net Book Value of the asset also decreases year after year. It is obvious that this would not look appealing to any stockholder reviewing the Financial Statements at the end of a fiscal year, given to the fact that people like to feel they are increasing their capital or their earnings today rather than in a distant future. This is the main reason why currently the majority of companies apply the Straight-Line method of Depreciation.
The importance of all this process is that eventually the asset that is being depreciated will have no more value left; it will cease to exist when its Net Book Value reaches zero. This means that since the asset is needed by the company for its daily operation, it needs to be replaced. What depreciation does is in some way prepare the company for when the new asset needs to be bought. In other words, by directly affecting the Revenue in the Income Statement, depreciation is also affecting the amount of profit the company distributes to its shareholders. If there was no depreciation expense, shareholders would be receiving higher profits at the end of the fiscal year, but there would be no resources left to replace assets once they were totally depreciated. With depreciation this is prevented, since its main goal is to replace and maintain the operational capacity of an organization, while at the same time applying important Financial Accounting Principles.
About the Author
My name is Monica Alvarez Fuentes, I'm 27 years old and I'm originally from Barranquilla, Colombia. I'm currently attending West Chester University in West Chester, PA as a Graduate Business student. I have a degree in Business Administration from a university in Colombia and worked during 5 years before deciding to continue my education. My work experience varies from travle agencies to pharmaceutical labs, so I have an overall knowledge of how an organization operates and all the important factors that contribute for it to be a successfull business.
Need some assistance?
Right - first I want to get a few things straight.
I am looking for sites that hold essays or theses or just simple proza about psychological/scientific tests PRO AND CONTRA (!!!) Astrology.
I am ONLY looking for sites, so whoever wants to share their opinion gets flagged. Simple as that. Nothing personal, but I'm not looking for opinions right now, I'm simply looking for test results. So only URL's, please.
For those PRO Astrology, I don't want new age URL's. I want actual scientific/psychological sites.
(I know of several experiments and tests conducted, but have been looking high and low on the internet and apart from Gauquelin, hardly anything purely scientific (so nothing opinionated) is found on the internet - enough in books, but that's of no use to me at this moment - so if anyone could help me out...)
Always willing to help. This site is updated twice a year.
Contra Straight-From-NES Play-through - No Hit, Flawless - Part 1




































































































