FINANCIAL ACCOUNTING Essay Example | Topics and Well Written Essays - 1750 words

FINANCIAL ACCOUNTING - Essay ExampleThe terms depreciation and amortization have various meanings in finance and investing. For example, depreciation sack up refer to the devaluation of a currency, and amortization can be used to describe the payment structure in a common type of loan (What is the going away between Depreciation and Amortization? 2003). Depreciation is charged to tangible assets, whereas amortization is charged to intangible assets. Fixed or tangible assets are those assets of the organization, which last to a greater extent than one year, for example furniture, buildings and machinery. Intangible assets are invisible assets that incur cost to the company, in terms of brand recognition, intellectual spot and goodwill. Both amortization and depreciation are non cash cost of the industry and they cause reduction in the earning, whereas, on the other hand, they lead to an increase in the cash flow. The reason for preserve depreciation as a cost is to increase the early purchase cost of the fixed asset more than than its reclaimable life. Whenever an industry makes its financial statements, it records a cost of depreciation to assign the divergence in price of equipment, machines and other fixed assets it has purchased. On the other hand, unlike other costs, depreciation is a non-cash charge. This office that no money is actually paid at the period in which the expenditure is incurred. The function of depreciation is to match the price of a creative asset to the incomes earned from using the asset. Since it is difficult to observe a direct relation to revenues, the assets price is usually assigned to the years in which the property is used. Depreciation systematically allocates or moves the assets cost from the balance sheet to expense on the income statement over the assets useful life. In other words, depreciation is an allocation process in order to achieve the matching principle it is not a technique for determining the sane market v alue of the asset (What is the Purpose of Depreciation, 2004). The International Accounting Standard Board (IASB) states that it is appropriate for plant and machinery to be depreciated and intangible assets to be amortized by employing a revenue-based amortization or depreciation method. A revenue based amortization or depreciation process is one that is derived from the transaction between price and units, and this considers the feasible future fluctuations in price as the basis of depreciation distribute the quantity of an asset that is to be amortized or depreciated. Tax benefits are also liable(predicate) to arise along with depreciation. While depreciation stands for non-cash payments in the income statement, it does decrease the industrys net income. Lesser net income will result in a lesser tax liability. To expand this benefit, industries frequently utilize an accelerated depreciation process. According to the International Accounting Standards Committee, depreciation is the part of the depreciable price of an asset more than its expected useful life. Depreciation for the accounting period is charged to income either directly or indirectly. Thus, it is clear from the above definition that depreciation is a loss arising on account of circumstances, some of which are known whereas others are not (Need Help with Accounting Assignment? 2002). The Internal Revenue Service provides organizations with an