It is important to understand the purpose of depreciation. Depreciation is an application of the accruals concept or matching concept. When a non-current asset is purchased the cost is:
- taken to the non-current asset account at cost and
- shown in the statement of financial position.
The cost is capitalised. However this asset is used within the business in order to earn profits. Therefore some element of its original cost must be charged to the statement of comprehensive income (‘charged to profit and loss’) each period in order to match the ‘consumption’ of the cost or value of the assets with the income that the asset is generating. Depreciation is the element of the cost of the non-current asset that is charged to the statement of comprehensive income each period. There are several ways of calculating the depreciation charge for the year.
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