What are the problems involved in depreciation in accounting?
Depreciation is a result of estimation and uncertainty. – estimating the life of the asset The more accurate the estimation, the more accurate your depreciation expense – deciding which method to use (straight or reducing balance) This should depend on the pattern of wear and tear of the asset. If the deterioration is higher at the beginning then you should use the reducing balance. If the pattern is uniform throughout, then you can use straight-line. – estimating the residual value of an asset Again, this is an estimation, and affects the depreciation expense – deciding what % rate to apply Once you’ve ascertained the useful life, this does not pose much of a problem – deciding whether the assets should be depreciated or what should be written off in profit and loss account as an expense (materiality concept) Depreciation may not be material in a particular year, but that is only the quantitative materiality. There is such a thing as qualitative materiality. Fixed assets require a not
