Posted by Anonymous on .
I need to see what you all think about my post in answering the question. Also, I need to comment on a few other posts, expanding their ideas. I need help on commenting one of the student's post (below).
Your friend Lucy slept through a class in which her professor explained the concepts of depreciation and amortization. Use the Cybrary's Accounting links and/or dictionary sources and the Internet to learn about these concepts, and then write a 4-5 paragraph explanation of the concepts for Lucy. Be sure to cite your sources.
In your own words, please post a response to the Discussion Board and comment on other postings. You will be graded on the quality of your postings.
Lucy, be advised that sleeping in this class is unacceptable. You have missed some of the major concepts that you will have to become familiar with in order to complete your future assignments correctly. I will take this time to teach you a brief overview of the concepts for the sake of your grades and personal learning. If you wish to not pay attention, then please feel free to tell me so.
One of the things that was addressed in class was depreciated and its relation to accounting. What is depreciation? Depreciation simply is something that decreases value over a period of years. Depreciation can be applied to building and equipment, to name a few. In such case, the cash flow will subject to increase, while net worth decreases. However, one is to strive to match the expense of the asset with the income associated with the expense. According to Labyrinth (2006), “To calculate depreciation charges for each fixed asset, you must know how much the asset cost (including all costs necessary to make the asset operational), how long the asset can reasonably be expected to last before it needs to be replaced, and whether the item will have any salvage value at the end of its useful life.”
Different methods are used by different companies to record the assets involved. For example, a straight-line method can be used with the assumption that the depreciation applied to an asset decreases a certain percentage for each year that is used. Conversely, when using the declining method, the asset depreciation is much more in the beginning years. Depending on the asset involved and the company’s situation, and in attempt to match the expense of the asset with the income associated with the expense, a particular method is used (Horngren, Harrison & Bamber, 2005). Therefore, it is important handle these accounting principles correctly.
Amortization follows the same principle as that of depreciation: depreciating value of an asset. However, what is distinct is that in Amortization; the value is given to, for example, the trademarks which perhaps more valuable to a firm in the present and long run. In depreciation, the value is in something of physical from, like building and others. A great example as given in Investopedia (2006), “Think of amortization (the deduction of capital expenses) as a way to claim the decrease in value on your car every year. If you bought your car new for $20,000 and after the first year it is worth $17,000, theoretically, you could amortize the $3,000 for tax and financial purposes.” In calculating amortization, the initial cost of the intangible asset is divided by the estimated useful life of the intangible asset.
Since intangible and tangible assets go in correlation with these concepts, it is only right to conduct a comparison to provide you with an over all picture. Intangible assets are usually a physical item, whereas tangible assets are worth money to a particular business and it is not a physical substance. One example of an intangible asset is capital asset, and an example of a tangible asset is trademark and good will. Regardless their differences (intangible versus tangible assets), they are both recorded on a balance sheet.