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Recommendation: its advantages and disadvantages - Essay Example

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Recommendation: its advantages and disadvantages

Recommendations To overcome the problem of unsystematic allocation of depreciable amount over the asset’s useful life, SASB has to find a method to allocate the total amount which is to be depreciated over each accounting period in the assets useful life. This can be done by use of either of two methods which include: straight-line method or residual method. Straight-line method is applied by allocating the depreciable amount equally to the whole useful life of the asset. The company should therefore, choose a constant annual depreciation charge, usually a percentage. This will be a systematic method since at no one point will the company fail to allocate the depreciation amount. The problem of revision of residual value on the other hand can be overcome by ensuring that the amount is revised on an annual basis with the written down value of the asset being used as the base of the percentage. Application of this method also requires that qualified professionals are employed to ensure that there are no inconsistencies involved in calculation (Alexander & Archer, 2008, P. 27). To the problem of revision of the depreciation method, I would recommend that SASB does not change the method that it decides to use between the two options. Instead, the company should ensure that the method that it decides to use is applied consistently. This is because regular changes in the method applied would lead to ambiguity in the results obtained (Warren, Reeve & Duchac, 2011, P. 452). One more recommendation to SASB is the application of the provision for depreciation. Estimating a value for provision for depreciation would help to reduce the likely uncertainties of the company. Though the company still subtracts the accumulated provisions, it will benefit by reducing any possible losses (Bebbington, Gray & Laughlin, 2001, P. 187). Advantages and Disadvantages of the Recommendations Every accounting principle applied in any business unit has its own advantages and disadvantages, and depreciation is no exception. However, most companies have realized that the advantages indeed outdo the disadvantages. Advantages Increased accuracy in accounting for business assets; though depreciation is mostly termed as just a capital allowance which might not have any effect on the company’s accounts, it indeed will affect the company’s profits as well as the overall incomes if not taken care of systematically. Thus, a systematic allocation of depreciation will help the company avoid cases of overstatement of the value of the assets. The level of accuracy in the accounting procedures is also increased since; the company will not overstate its profits. An additional advantage of the recommendations is that; a regular review of the residue value will help the company avoid uncertainties and also ensure that it keeps all its information updated in case of an abrupt audit of the accounts. Consistent application of a single depreciation method is indeed advantageous to the company since it avoids confusion of the system and any possible malfunctions. In addition, a company should apply the same depreciation method for all assets. Estimation of a provision for depreciation is advantageous since it will help the company minimize it losses. Disadvantages The main disadvantage of the recommendations is time consumption. Calculation of depreciat ...Show more

Summary

Depreciation Name: Institution: Depreciation has been defined by scholars as the process of allocating costs of tangible assets over periods which the asset has benefitted the company (Peterson, 2002, P. 95). With time, the long-term assets of a company become obsolete while some lose value due wear and tear effects…
Author : warrenhane
Recommendation: its advantages and disadvantages essay example
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