Assume Little King Sandwiches depreciates a building over 40 years and University Hero depreciates a similar building over 20 years, and both companies use the straight-line depreciation method. Explain the difficulties in comparing the income statements and balance sheets of the two companies.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Assume Little King Sandwiches
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