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Finance & Accounting
Pages 7 (1757 words)
Financial Accounting i) A discussion of justifications for charging depreciation/amortisation and an analysis of the extent to which depreciation/amortisation charges are consistent with the IASB Conceptual Framework. [50 marks] Depreciation is the reduction in cost of an asset after a particular period of time, basically an accounting year.
“The terms depreciation and amortization have various meanings in finance and investing. For example, depreciation can refer to the devaluation of a currency, and amortization can be used to describe the payment structure in a common type of loan” (What is the difference between Depreciation and Amortization? 2003). Depreciation is charged to tangible assets, whereas amortization is charged to intangible assets. Fixed or tangible assets are those assets of the organization, which last more than one year, for example: furniture, buildings and machinery. Intangible assets are invisible assets that incur cost to the company, in terms of brand recognition, intellectual property and goodwill. Both amortization and depreciation are non cash cost of the industry and they cause reduction in the earning, whereas, on the other hand, they lead to an increase in the cash flow. The reason for recording depreciation as a cost is to increase the early purchase cost of the fixed asset more than its useful life. Whenever an industry makes its financial statements, it records a cost of depreciation to assign the loss in price of equipment, machines and other fixed assets it has purchased. On the other hand, unlike other costs, depreciation is a non-cash charge. ...
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