What is depreciation? Show
Depreciation is defined as a reduction in value of an asset with the passage of time, due in particular to wear and tear. It is also an accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy and sometimes represents how much of an asset’s value has been used up. For those communities that perform an external audit, depreciation calculations are a required component. Generally, this calculation is an accounting of the remaining value of a capital asset when accounting for the life of the asset, original cost, and years since the construction or purchase of the asset. This number is used by funders (such as Bond Bank) in evaluating an applicant’s credit strength as high ratios of accumulated depreciation to original cost may indicate a need for debt financing to overcome the backlog. For communities that do not perform an external audit, they can track assets using straight line depreciation on a simple spreadsheet using the methods described above. In both cases, the purpose is to represent the original and remaining value of capital assets with the value serving as a proxy for future investment needs within a community. How does depreciation get funded? A community may ‘fund’ depreciation by adding the annual calculated value to the approved budget as an expense. If truly funded, at the end of the year, the account would have at least that line item’s amount left over. For example, if a budget had $15,000 in depreciation as a line item, there should be at least $15,000 left unexpended in the budget at the end of the year, assuming rates/taxes were established to reflect the total amount of revenue, including depreciation, that was needed. This amount would then be counted toward a reserve fund or held in the account as cash. The issue most budgets run into is there is not $15,000 left over at the end of the year, meaning that other line items were over expended or anticipated revenue was down. So, is that it, we just fund depreciation for future capital spending? No! Using depreciation as a proxy for future capital needs can be a good start in establishing reserves, but it certainly isn’t nor should it be the only way a community calculates and saves. There are some inherent challenges with only relying on depreciation as the foundation of capital reserves not the least of which is depreciation doesn’t take into consideration inflation, as the cost to purchase and install said asset will almost certainly increase but the amount that is depreciated remains the same. There are myriad ways to fund infrastructure investment, both through saving and borrowing. See other articles Bond Bank has published including Asset Prioritization in an Economic Downturn or Paying for Infrastructure or Funding v. Financing How can a community evaluate if it is on track with investing in their infrastructure? One metric a community can use to evaluate how well they are investing is to calculate their Capital Asset Depreciation ratio. This is the ratio of Accumulated Depreciation to Gross Depreciable Assets, excluding land and construction in progress. Both of these numbers can be found in the annual audit. The closer to 1.0 or 100% the closer the assets are to being fully depreciated. In fact, much above 60-65% means a community needs to be actively evaluating in their assets and could indicate necessary investment is imminent. Of course, there are other metrics that can be used. Examining how much is being spent on routine maintenance or emergency repairs over time can be used to gauge how an asset is aging and if it might be time to reinvest. Asset management is another good tool. And while less quantitative, using public feedback or good old ‘boots on the ground’ are other tools at a community’s disposal. Home Depreciation is decline in the value of assets due to: Question A Passage of time No worries! We‘ve got your back. Try BYJU‘S free classes today! B Obsolescence No worries! We‘ve got your back. Try BYJU‘S free classes today!
C Wear & tear No worries! We‘ve got your back. Try BYJU‘S free classes today! D All the above Right on! Give the BNAT exam to get a 100% scholarship for BYJUS courses Open in App Solution The correct option is DAll the aboveDepreciation is the decline in the value of assets due to passage of time, wear and tear, obsolescence and end of legal rights.Suggest Corrections 0 Similar questions Q. Write the word/term/pharse which can substitute each of the following statement : A gradual, continuous and permanent reduction in the value of Fixed assets due to its use, wear and tear or any other Cause. Q. Depreciation is the _________ in the value of fixed assets due to its wear and tear. Q. Depreciation is the fall in the ____________ of a fixed asset through physical wear and tear due to use or passage of time or from any other cause. Q. __________ has defined depreciation as "a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of depreciable amount in each
accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined." Q. _______ has defined depreciation as "a measure of the wearing out, consumption or other loss of value of a depreciable asset arising
from use, effluxion of time of obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined. View More Is the reduction in the value of an asset with the passage of time due to wear and tear?Depreciation is defined as a reduction in value of an asset with the passage of time, due in particular to wear and tear. It is also an accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy and sometimes represents how much of an asset's value has been used up.
What is the reduction in the value of an asset?Depreciation means a reduction in the value of an asset over time, due in particular to wear and tear. Depreciation, i.e. a decrease in an asset's value, may be caused by a number of other factors as well as such as unfavourable market conditions, etc.
When asset in use gradually reduced in value is called which asset?Gradual and permanent decrease in the value of an asset is known as depreciation.
Is the reduction in the value of an asset in a systematic manner until the value of the asset becomes zero or negligible ignoring the useful life of an asset?In accounting terms, depreciation is defined as the reduction of the recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible.
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What is a reduction in the value of an asset with the passage of time due in particular to wear and tear?
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