What Is Depreciation and How to allocate and valuate the depreciation
What is a depreciation?
The simple meaning of depreciation is to allocation and valuation ,
The depreciation aims to recover the money invested by the company in depreciable assets and to approximate the value of the depreciable assets.
Depreciation is generally the term used to refer to when the value of an asset decreases
I What is depreciable asset?
The fixed asset that can be destroyed by humans is called the depreciable asset
important information of depreciation
What you need to understand from this is that generally everyone has doubts and many do not know the correct explanation for it, for example, $500 is deducted as rent on the debit page of the profit & loss account that is paid to the landlord as well as the salary is deducted $300 which is paid to the employees of the company, and depreciation is deducted $1000, but most people here have no understanding of who it is given to . You can understand those details here. The depreciation amount deducted from the profit & loss account is returned to the shareholders because this amount was borrowed from them, but such details do not come directly into the company's account.
You need some understanding of reserve to know more about depreciation, so please read the details given below,
What is revenue reserve ?
The ShareHolder Allocate A Portion Of The Company Is Profits For The Development Of The Company, That Is Called The Revenue Reserve.
The company buys the property from the money allocated for the Development of the company.(Revenue Reserve)
For example
The company has borrowed $10000 from shareholders to buy the warehouse
What is Depreciation allocation?
A certain amount is set allocate from the profit in the company to repay the borrowed money from the shareholders. That Is Called The Depreciation allocation.
The amount allocated is determined on the basis of depreciation calculation
10 000 * 10/100 = 1000
What is a Depreciation Valuation ?
You know that the selling price of second hand goods is less than the (purchase) actual value of the goods , So It is not good practice to record the balance sheet intact without changing the purchase value of the goods
so know the true value of a company asset, depreciation must be calculated on depreciable assets.
10 000 - 1000 = 9000
depreciation allocation and valuation
transaction (2022)
- capital $15000 cash $25000 G/P $10000 , revenue reserve $10000
- Rent paid to Mr. Hon $200 and New warehouse purchased from Mr. Hon $10000
| profit and loss A/C | |
|---|---|
| particular | amount |
| G/P | 10000 |
| rent | (-)200 |
| tax | (-)800 |
| N/P | 9000 |
| liability | | | | asset | |||
| capital | net profit | reserve | | | |
cash | warehouse |
|---|---|---|---|---|---|
| - | |||||
| 15000 | 9000 | 10000 | | | 25000 | |
| | | (+)9000 | ||||
| | | (-)10000 | 10000 | |||
| ____ | __ | __ | __ | _ | _ |
| 15000 | 9000 | 10000 | | | 24000 | 10000 |
transection (2023)
- capital $15000 cash $24000 N/P $9000 ($9000 Dividends are distributed to shareholders) ,G/P $10000 , reserve $10000 ,warehouse $10000
- $9000 Dividends are distributed to shareholders ,depreciation $1000
| profit and loss A/C | |
|---|---|
| particular | amount |
| G/P | 10000 |
| depreciation | (-)1000 |
| tax | (-)1000 |
| N/P | 8000 |
| laibility | | | | asset | |||
| capital | net profit | reserve | | | |
cash | warehouse |
|---|---|---|---|---|---|
| - | |||||
| 15000 | 9000 | 10000 | | | 24000 | 10000 |
| (-)9000 | | | (-)9000 | |||
| (+)8000 | | | (+)8000 | |||
| | | (+)1000 | (-)1000 | |||
| ____ | __ | __ | __ | __ | _ |
| 15000 | 8000 | 10000 | | | 24000 | 9000 |
This balance sheet is given to make it easy for you to understand, usually, the closing value of the cash account is $33 000 (24000 + 1000 + 8000), which is the amount of depreciation that is not deductible. if you have any doubts please post below,
Profit distributed from net profit to shareholders $8000 and reserve fund $1000(01/06/23)
| laibility | | | | asset | |||
| capital | net profit | reserve | | | |
cash | warehouse |
|---|---|---|---|---|---|
| - | |||||
| 15000 | 8000 | 10000 | | | 24000 | 9000 |
| (-)8000 | (-)1000 | | | (-)8000 | ||
| | | (-)1000 | ||||
| ____ | __ | __ | __ | __ | _ |
| 15000 | NIL | 9000 | | | 15000 | 9000 |
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