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fin621 topic"useful life of assets"

The general principle is that "useful life" is taken to mean the amount of time for which an asset can be useful. In other words, this means the amount of time before it is worn out or obsolete and needs to be replaced. The role of depreciation is to spread the cost of an asset over its useful life. This is particularly important for a very large asset, like a company building a new factory. If they accounted for the whole asset as an expense all in one year, then they would make an enormous loss. The use of assets in the generation of revenue is usually more than a year- that is long term. It is therefore obligatory that in order to accurately determine the net income or profit for a period depreciation is charged on the total value of asset that contributed to the revenue for the period in consideration and charge against the same revenue of the same period. Depreciation is usually spread over the economic useful life of an asset because it is regarded as the cost of an asset absorbed over its useful life. Invariably the depreciation expense is charged against the revenue generated through the use of the asset. So, net income is also effected by the fixed assets. It is worth noting that not all fixed assets depreciate in value year-over-year. Land and buildings, for example, may often increase in value depending on local real-estate conditions. Useful life of a fixed asset is the key factor that influences the depreciation to be charged against that asset for an accounting period. Normally a company can show an increase its net income by increasing the estimated useful life of a fixed asset. Example 1 (effect of estimated life): Lets say cost of an asset is Rs.10,00,000/- We assume that residual value is Rs.100,000. Straight line method is used in this example. Depreciation = (Cost of an Asset – Salvage Value) / Estimated life i) If estimated life is 5 years Depreciation = (10, 00,000 - 1, 00,000) ÷ 5 = 1, 80,000 ii) If estimated life is 10 years Depreciation =( 10,00,000 – 1,00,000 ) ÷ 10 = 90,000 By spreading cost over ten year company can show enhancement and increase in profit effect for in early five years. As only 90,000 will be charged as depreciation in cost of production instead Rs.180,000. So, the net income will increase by Rs.90,000 in this case. Example 2 (effect of estimated salvage value): Let's say cost of an asset is Rs.10, 00,000/- .And estimated life is 10 years. i) If estimated salvage value is Rs.1, 00,000 Depreciation = (10, 00,000 – 1, 00,000) ÷ 10 = Rs. 90,000 ii) If estimated salvage value is Rs. 2, 00,000 Depreciation = (10, 00,000 – 2, 00,000) ÷ 10= Rs.80,000 Higher estimate salvage value result in decreased depreciation that lead to the higher profit. Therefore, it can be concluded that by longer useful life of fixed assets and salvage value net income is affected.

announcement by VU

This is to inform all students who are enrolled in Extra semester, the vouchers for fall 2009 will be uploaded after October 15, 2009.
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Published On: Saturday, September 26, 2009
NOTIFICATION



Dated: September 26, 2009



Virtual Univeristy of Pakistan will observe following timings for students w.e.f. Fall 2009 (commencement date: September 28, 2009) semester.





Monday to Friday
08:00 AM to 06:00 PM





No classes will be conducted on Saturday and Sunday.





Registrar, VU

Virtual Univeristy of Pakistan