Unit 5 DB - Statement of Cash Flows - Introduction to Accounting

Accounting for depreciation and amortization are based on the accruals principle of accounting , which contends that revenue and expenditure are recorded in the period incurred and not when paid . Indeed depreciation and amortization are non-cash expenses . Both methods comprise the computation of the loss in value arising in a capital asset due to wear and tear and /or time element . In this respect these techniques determine in proportionate bases the loss in value that the asset will suffer during its useful life

As already stated above accounting for depreciation and amortization

will lead to a decrease in the asset portrayed in the balance sheet However , due to the matching premise , such a transaction will also lead to a decline in the net income reported for a particular period . In fact the depreciation and amortization charge for that period is portrayed as an expense in the income statement

Depreciation is a method that is normally adopted for tangible fixed assets , like equipment , machinery and motor vehicles . The premise upon which depreciation is accounted for is usually due to the wear and tear arising from the asset use . The most frequently utilized methods are either the straight line method or the reducing balance method . Under the straight line method an equal depreciation charge is deducted over the assets life , after taking into consideration of the asset 's scrap value . Under the reducing balance method the depreciation charge is based on the net book value leading to a higher depreciation at the initial...