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When do we start to account the depreciation of the asset?

1. date of purchase 

2- when asset   be ready for use 

3- Date of began to benefit and use

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تم إضافة السؤال من قبل FITAH MOHAMED , Financial Manager , FUEL AND ENERGY CO for transportion petroleum materials
تاريخ النشر: 2016/07/27
Ghada Eweda
من قبل Ghada Eweda , Registered student MBA-marketing , AOU

The correct answer is3- Date of began to benefit and use

International Accounting Standard (IAS) defines depreciation as “the systematic allocation of the depreciable amount of an asset over its useful life”.

The term “amortization” is usually used in the case of intangible assets instead of “depreciation”. The meaning of both of these terms is the same.

From the above definition of depreciation, explanation of the terms “systematic allocation”, “depreciable amount” and “useful life” is required. Depreciable amount is the cost of an asset less its residual value. Depreciable amount of an asset is the value which is systematically allocated over the useful life of asset. The depreciable amount of an asset takes into account the expected residual value of the asset.

Systematic allocation means that the depreciation is charged according to a consistent policy and method. For example the depreciation can be charged on straight line basis, reducing balance method, or accelerated method.

Useful life of an asset the period over which an asset is expected to be utilized or the number of production units expected to be obtained from the use of the asset. Expected useful life is the period “used” not the assets economic life, which can be significantly longer. The useful life is determined on the basis of use, expected capacity, expected output, legal limits, maintenance program, expected wear and tear, and technical or commercial innovations.

Depreciation starts being charged when an asset is in the location and condition that allows it to be used in the intended manner. The depreciation should be charged even if the asset is temporarily idle because future economic benefits are consumed not only through usage but also through wear and tear and obsolescence. Depreciation ceases at the earlier of its derecognition (i.e. disposal or scrapping) or its reclassification as “held for sale”.

 

Each part of an item of property plant and equipment with a significant cost shall be depreciated separately. The depreciation should be charged to the statement of comprehensive income unless it is included in the cost of producing another asset. 

Buildings, machinery, equipment, furniture, fixtures, computers, outdoor lighting, parking lots, cars, and trucks are examples of assets that will last for more than one year, but will not last indefinitely. During each accounting period (year, quarter, month, etc.) a portion of the cost of these assets is being used up. The portion being used up is reported as Depreciation Expense on the income statment. In effect depreciation is the transfer of a portion of the asset's cost from the balance sheet to the income statement during each year of the asset's life.

The calculation and reporting of depreciation is based upon two accounting principles:

  1. Cost principle. This principle requires that the Depreciation Expense reported on the income statement, and the asset amount that is reported on the balance sheet, should be based on the historical (original) cost of the asset. (The amounts should not be based on the cost to replace the asset, or on the current market value of the asset, etc.)
  2. Matching principle. This principle requires that the asset's cost be allocated  to Depreciation Expense over the life of the asset. In effect the cost of the asset is divided up with some of the cost being reported on each of the income statements issued during the life of the asset. By assigning a portion of the asset's cost to various income statements, the accountant is matching a portion of the asset's cost with each period in which the asset is used. Hopefully this also means that the asset's cost is being matched with the revenues earned by using the asset.

There are several depreciation methods allowed for achieving the matching principle. The depreciation methods can be grouped into two categories: straight-line depreciation and accelerated depreciation.

 

The assets mentioned above are often referred to as fixed assets, plant assets, depreciable assets, constructed assets, and property, plant and equipment. It is important to note that the asset  land is not depreciated, because land is assumed to last indefinitely.

Mujibur Rahman ACCA
من قبل Mujibur Rahman ACCA , Founder And CEO , MR-Accountants

2- when asset   be ready for use 

SHAHZAD Yaqoob
من قبل SHAHZAD Yaqoob , SENIOR ACCOUNTANT , ABDULLAH H AL SHUWAYER

Depreciation begins when you place an asset in service and it ends when you take an asset out of service or when you have expensed its cost, whichever comes first.For financial statements, you are guided by the matching principle. The objective is to match the cost of the asset to the accounting periods in which revenues were earned by using the asset. There are two estimates needed: 1) the number of years that the asset will be used, and 2) the salvage value at the end of the asset's use. If an asset has a cost of $100,000 and is expected to be used for 10 years and then have no salvage value, most companies will depreciate the asset at the rate of $10,000 per year. This is known as the straight line method of depreciation.For income tax purposes in the U.S., the Internal Revenue Service has determined the number of years that various assets will be useful and it assumes there will be no salvage value. The IRS also allows companies to take larger depreciation deductions in the earlier years and smaller deductions in the later years of the assets' lives. This is known as accelerated depreciation.As you probably noted from the above information, in any one year the depreciation expense on the financial statements will be different from the depreciation expense on the income tax return. However, over the life of an asset, the total depreciation expense will be the same. Accountants refer to this as a timing difference.

مستخدم محذوف‎
من قبل مستخدم محذوف‎

OPTION 3. DATE OF BEGAN TO BENEFIT AND USE...

Frank Mwansa
من قبل Frank Mwansa , ACCOUNTING LECTURER , FREELANCER

Date began to benefit and use

yasser talaat
من قبل yasser talaat , accountant manager , الشركه المصريه

very good question and i think the answer 

we start to account the depreciation when the assets start to work

Zaheer uddin Raja
من قبل Zaheer uddin Raja , Accounts Supervisor , Pakistan International Airlines

Option 2- when the asset is ready for its intended use.

Maham SHAFIQ
من قبل Maham SHAFIQ

      i.        Mr. Zaheer acquired Bin Qutab International, for cash 50, 000 by taking over the following assets and liabilities at values stated against them: Stock 15,000; Cash 25,000; office Furniture 10,000; Debtors 7,000; Machinery 8,000 & Creditors 15,000.

     ii.        Bought supplies from Abdul Hadi worth $6000 & half the amount was paid in cash.

    iii.        Purchased Goods from AL Corp. for $2,500

    iv.        Goods worth $5,000 was sold to Mr. Homaeer and a cheque received for the due

     v.        Rent of $6,000 was paid. This includes $2000 which was paid for Mr. Zaheer’s House.

    vi.        Mr. Zaheer sold his personal car for $4,000 and bought a new one for business with the proceeds plus 5,000 from office cash.

   vii.        Received rent refund $400

  viii.        Received 5% discount from Abdul Hadi on full payment of the due balanc

    ix.        Mr. Zaheer bought furniture worth 4,000 of which, those worth 1,000 are for office use and the balance for stock.

     x.        Purchased goods on credit from Rehbar Traders on May 5 for $5000. The owner offered 10% discount if the payment will be made in the same month

    xi.        Sold Machinery to Rahim Sons and received $4200 half of the total amount.

   xii.        Purchased Inventory from Mr. Gohar for $1700

  xiii.        Counter Sales for the week $2200

  xiv.        Habib Sons bought goods by paying $1200 cash and the remaining $800 will be paid next month

   xv.        Paid Rehbar Traders the amount due on May 28

  xvi.        Commission received as referral fee $1,300

 xvii.        Habib sons paid half of the due balance

xviii.        Habib Sons has just been declared bankrupt and his account is written of as Bad debts.

 

Naji Mohamed
من قبل Naji Mohamed , Audit Manager , Apex chartered Accountants

it is up to the accountant, he can start accounting for the depreciation when the asset in question is being depreciated, whether it is being used or not in use but can loss some of it's value.

Majed Hallak
من قبل Majed Hallak , Senior Accountant , Yusr Group

Based on the matching principle, expenses matching revenues, we record the depreciation expense when the asset starts making revenues. Meaning that when you start using using the asset you start the depreciation

Shameer Nazir Madari
من قبل Shameer Nazir Madari , Assistant Finance Manager , METAL AND RECYCLING COMPANY K.S.C. (PUBLIC)

Correct Answer is

3- Date of began to benefit and use

 

You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first.