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Discy Latest Questions

  1. This answer was edited.

    Depreciation as an Operating Expense Yes, depreciation is an operating expense. To understand this you might want to check the illustrative case given below: You have an entity providing financial services to your clients. You had commenced it 4 years ago. At the time of commencement of the operatioRead more

    Depreciation as an Operating Expense

    Yes, depreciation is an operating expense.

    To understand this you might want to check the illustrative case given below:

    You have an entity providing financial services to your clients. You had commenced it 4 years ago. At the time of commencement of the operations you had 25 employees and laptops being the core assets of your business, were purchased by you for your team initially.

    After 4 years do you still believe that if you dispose these laptops or you decide to replace them you will get the same amount you had spent initially for purchasing them or could they have the same features and technology that a newly launched laptop currently has or uses?

    The answer to this is Obviously Not. The new laptop available in the market will have better features and might be faster. Also, these used laptops shall not possess the same value at the time of their replacement.

    I will have a quick run over the concept of “What is Depreciation?”

    Depreciation is nothing but a diminution in the value of an asset, due to natural wear and tear, exhaustion of subject matter, effluxion of time accident, obsolescence or similar causes.

    Assuming you have received an answer but you still don’t get the logic for treating it as an operating expense the below-given para may be of some help.

    An operating expense is an expense that a business incurs for carrying on its normal operations. Hence, since depreciation is charged on an asset that’s used for day to day business operations it is covered under operating expense even though its a non-cash expense.

    Based on the above para you would agree that all the operating expenses are presented on the debit side of profit and loss or an income statement. And since depreciation is related to an asset used for manufacturing or providing service or aiding business for that matter it is an operating expense and so it shall also be presented on the debit side of an income statement.

    You can check the profit and loss statement added below for a better understanding of the treatment of depreciation in the income statement.

    Depreciation in an income statement

    The depreciation can be treated as a non-operating expense only in the specific circumstances where the assets are not used for the main operations of the business. When such an asset is used for an incidental operation then we treat depreciation as a non-operating expense.


    Aastha

     

     

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  1. This answer was edited.

    Charging Depreciation  in the Year of the Sale The answer to your question is that yes, one can charge depreciation in the year of sale. I guess reading the below para you will be able to interpret as to why it can be charged in the year of sale. First of all, what does depreciation mean? It is a meRead more

    Charging Depreciation  in the Year of the Sale

    The answer to your question is that yes, one can charge depreciation in the year of sale.

    I guess reading the below para you will be able to interpret as to why it can be charged in the year of sale.

    First of all, what does depreciation mean?

    It is a measure of 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.

    It is allocated to charge a fair proportion of depreciable amount in each accounting period during the expected useful life of an asset.

    Thus, even in the year of the sale, the asset shall continue to wear and tear and so it shall be apt to charge the depreciation from the beginning of the accounting period till the date of its sale i.e for the period it has been used in the year of sale.

    I guess the below example will be of great help for you –

    The book value of an asset as on 01 /01/ XXXX is 70,000 depreciation is charged on an asset @ 10%. on 01/07/xxxx the asset is sold for an amount of 35,000.

    The accounting treatment for the same shall be:

    Charging depreciation of an amount of 3,500 (70,000 x 10% x 6/12) for 6 months i.e for the period in use (from 01/01 to 30/06):

    Depreciation A/cDebit3,500Debit the increase in expenses.
    To Asset A/cCredit3,500Credit the decrease in an asset.

    Now at the time of sale, the entity shall record a loss of 31,500 which is nothing but the difference between the written down value and the value of sale proceeds as shown below:

    Loss on Sale of Asset A/cDebit31,500Debit the decrease in revenue.
    Cash A/cDebit35,000Debit the increase in an asset.
    To Asset A/cCredit66,500Credit the decrease in an asset.

    I believe now you understand as to why we should charge depreciation in the year of sale as well and also the above example will help you understand the accounting treatment for the same as well.


    Aastha Mehta

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