Depreciation and Sale of Asset

Depreciation is the decline in the future economic benefits of a depreciable non-current asset through wear and tear and obsolescence. It is an allocation process. It can be calculated by two main methods, each reflecting in a distinct prospect in the way the asset is used. Depreciation is to be treated as an estimated expense that does not set aside cash for the replacement of a non-current asset. In determining the cost of acquisition of …

…cost allocated in the early years. He should be aware that depreciation is a process of allocation and not asset valuation. W. Wally must also consider any capital expenses that he makes towards the lathes and add the expenditure to the purchase price to enable the calculations of the depreciation to be correct. He must understand that depreciation is an expense and will reduce the net profit but it does not involve any cash outlay.