Observation

Majority of the candidates attempted this question on depreciation and performed well above average.  However, few candidates were unable to present their points correctly and mistook factors that determine depreciation charge for causes of depreciation. Some of the suggested responses were:

Depreciation

It is that part of the cost of a fixed tangible/non-current asset consumed during its period of use by an organization.

OR
It is the reduction in the economic value of a fixed tangible/non-current asset as a result of wear and tear, usage and passage of time.

Factors that determine depreciation charge

1. Cost of the fixed asset: The cost includes the purchase price, cost of installation as well as any cost of improvements or expansion to the fixed/non-current asset.
2. The estimated useful life: This is the number of years that the fixed/non-current asset is expected to provide useful services before it is put out of use.
3. The estimated/scrap/residual/terminal value: This is the estimated amount/proceeds expected from the fixed/non-current asset at the time of disposal.
4. The method of calculating depreciation: The method of depreciation that is considered appropriate for that particular fixed/non-current asset must be determined by management.

Reasons for providing for depreciation         

1. To allocate  part of the cost of the asset against the revenue of the various years in which it is expected to be in use in order to comply with the going concern concept.
2.  To show the net book value of the fixed/non-current asset in the balance sheet.
3.   Depreciation will provide a good basis for the pricing of the asset if it is to be disposed.
4. To provide a basis for determining how much to be invested for the replacement of the fixed/non-current asset.
5. Depreciation is provided in order not to overstate the profit for any year of operation in order to comply with the prudence concept.
6. Depreciation is provided to serve as a basis for assessing insurance claims.
7. It ensures that the cost of the fixed/non-current asset is spread over its useful life.
8. It serves as a guide in determining when to replace the fixed/non-current asset.
9. To ascertain the profit or loss on the disposal of the fixed/non-current asset.