Accounting for Natural Resources

What Are Natural Resources? Natural resources are physical substances that are converted into inventory when extracted from the ground and, when sold, produce revenues for the firm. Natural resources include oil, natural gas, coal, iron, uranium, and timber. These assets are often referred to as wasting assets. This is because once they are removed from the ground or physically consumed, they cann…

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Disposal of Property, Plant or Equipment

Disposal of plant assets can occur through the retirement of discarded assets, sales, involuntary conversions, or trade-ins. No matter how the disposal is accomplished, the accounting procedures are quite similar. Depreciation must be recorded up to the date of disposal and, where appropriate, a gain or loss must be recorded on the disposal. In this article, these concepts are explained by demonst…

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Comparison of Various Depreciation Methods

This article uses examples to compare different depreciation methods. One of the most important points to note is that in all cases, the total depreciation expense over each of the five years is $36,000. As a consequence, the balance in the accumulated depreciation account at the end of the fifth year is also $36,000 in all cases. This shows that we are dealing with various ways to allocate the sa…

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Accounting Concept of Depreciation

Depreciation is the most misunderstood accounting concept, and yet it is one of the most important. One of the best ways to understand the nature of depreciation is to explore what depreciation is not. The Nature of Depreciation Noncurrent, nonmonetary assets are purchased because they represent bundles of future benefits. All of these assets, with the exception of site land, eventually give up th…

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Recommendations of Choksi Committee on Depreciation

1. Depreciation under the Income Tax Act is not merely a provision for charging against taxable profits the capital expenditure incurred by an undertaking on the depreciable asset over the useful lives of the assets. It is also aimed at working as a tax incentive measure affecting the cash flow of business enterprises and the generation of internal resources for the replacement of assets that have…

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Depreciation Accounting

From the point of view of financial accounting, depreciation accounting is concerned with the allocation of the cost of an asset over its useful life and charging the revenues of a period with the expenses of earning those revenues. The first objective of depreciation accounting is that the depreciation policy may be aimed at recapturing from a period’s revenue sufficient monetary units either to…

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Effects of Depreciation on Cash Flow

Depreciation and Cash Flow Depreciation is a component of the cost of production, but it is a different type of cost. To produce a product, a company may have to spend on materials, labor, and overheads. But it does not have to spend anything as depreciation. The spending has already taken place in the form of the cost of the asset. Now, a portion of such cost is attached to the cost of production…

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Reserves and Provisions

A business may seek to provide for contingencies as per the concept of conservatism. These contingencies can broadly be classified into two categories: (i) Unforeseen contingencies: Contingencies that the business is unsure about their nature and amounts (e.g., amounts set aside to prevent a reduction in the dividend rate due to a possible decline in profits). (ii) Expected contingencies: Continge…

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Sinking Fund Method of Assets Depreciation

The sinking fund method of assets depreciation is also known by other names, including the redemption fund method and amortization fund method. It requires depreciation on an asset to be provided through a depreciation or sinking fund, which is brought into being by accumulating the amount of depreciation at a flat rate charged to the profit and loss account every year investing the amount of depr…

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Annuity Method of Assets Depreciation

Definition In the annuity method of assets depreciation, it is supposed that the money invested in the purchase of the asset earns interest at a fixed rate. This is debited to the asset account and, according to the annuity table, a certain fixed amount of depreciation is charged everywhere for the estimated useful life of the asset. Explanation The amount of depreciation calculated by the annuity…

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