Changes in the estimates for residual value or useful life result in changes in the depreciation expense calculation. These changes are handled O retroactively. O as cumulative changes. O prospectively. O as prior period adjustments.
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.
Lets understand the basics.
Accounting policies are set of principle, rules which are followed for preparation of financial statement. It can be depreciation methods, inventory valuation methods etc.
If any changes arise then impact of the change in accounting policy needs to given impact retrospectively.
On other hand accounting estimates are estimates made by management for preparation of financial statement. It can be change in useful life, change in residual value etc.
If any changes arise then impact of the change in accounting estimate needs to given impact prospectively.
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