How should the changing value of a fixed asset be reflected in a companys accounts?
The benefits that a business obtains from a fixed asset extend over several years. For example, a company may use the same piece of production machinery for many years, whereas a company-owned motor car used by a salesman probably has a shorter useful life. By accepting that the life of a fixed asset is limited, the accounts of a business need to recognise the benefits of the fixed asset as it is “consumed” over several years. This consumption of a fixed asset is referred to as depreciation. Definition of depreciation Financial Reporting Standard 15 (covering the accounting for tangible fixed assets) defines depreciation as follows: “the wearing out, using up, or other reduction in the useful economic life of a tangible fixed asset whether arising from use, effluxion of time or obsolescence through either changes in technology or demand for goods and services produced by the asset.’ A portion of the benefits of the fixed asset will be used up or consumed in each accounting period of it
