Accounting For Depreciation In Manufacturing
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For a manufacturing firm like golden Guinea plc to carry out its business successfully and to meet its main objectives it needs among. Other things fixed assets. The fixed assets unlike current assets are held over several period wish the objective or earning revenue. Hence, the amount of money spent on their purchase is treated as capital expenditure. Accepted expenditure refers to the amount spend by on organization of the acquisition of a permanent assets intended profits.
There are numerous example of these types of assets some of which are land and building, however, these comprise of the company’s factory building, offices and warehouses used for storage purpose, others include pant and machinery, fixtures and fittings and equipment. These assets are used by industries or manufacturing organization for actual transformation or raw material into sleazier finished goods. The last but not the least are nature resource. These consist of mine queries oil coal and gas deposits.
These are some time called lasting assets. Assets since they became worthless when the deposit or resources have been depleted. In addition, they are normally consumed in the services of the business by effusion of time that is by wear and tear.
This fixed assets are normally recorded in their book at then cost pride, but it is assured that after making use of them for some periods, usually more than one financial year their value and efficiency decrease.
For examples, after some years efficiency and productive capacity decline continuous xxx it reduces a time when the assets becomes useless and need replacement.
Hence, it is a fact that on asset depreciates from year to year when it is employed in the business.
This reduction in the value of fixed asset is known in accounting term as depreciation of fixed assets for which the work is.
1.2 STATEMENT OF PROBLEM
Depreciation is a sort of expense used in determining the cost at a real or capital asset in carrying out the operations of any manufacturing firm or enter press, in order to determine and report the real profit of an organization for the purpose of evaluating its performance.
There are different methods of providing for this depreciation expenses in the books of manufacturing firms and the presence of these different methods of providing for deprecation have varying impact which leads to variation in the reported profits and in the net book value of assets stated in their financial statement of manufacturing firms.
Most people are not aware of these methods of providing for depreciation and hence their resultant impact or affect on the reported profit and the net book value of asset stated in the financial statement, that they tend to pass erroneous judgment on the profitability of one manufacturing firm or the performance comprises between their reported profit in the financial statement, without regard to the last element charged against revenue of which deprecation expenses which is arrived at by different method is a very important part.
The use of the different depreciation methods by manufacturing firm in computing depreciation expenses bring about difference in the reported profit and in the net book value of asset stated in the balance sheet as at the year end. This is the problem, which this project it to investigate and provide answer to.
Depending on circumstances the company may use any method but must be consistent because to principles of consistency is laid down by the SSAP.
The relevant method a manufacturing firm chooses normally depends on the management policies and practices on depreciation, for instance depending on the circumstance facing a particular firm at any given period, management will decide on which method of providing for depreciation is appropriate in order to aim the optimum benefit.
Many factors are taken into consideration in determine the useful like for an asset, which is very important feature in computing depreciation expense. One of these factor is considering the use and capacity of the asset and this varies in direct proportion with time.
1.3 OBJECTIVE OF THE STUDY
The major purpose of this study is to enumerate different ways of accounting for depreciation in manfucturing industries and how depreciation computation using the different method affect the profitability of manufacturing firms. The treatment of deprecation under inflationary condition in auditing e.t.c, will also be determined.
This study is also meant to deal with other important feature, involved in depreciation accounting, such as disposal of depreciation assets.
1.4 SIGNIFICANCE OF STUDY
This project will be significance to a lot of bodies which have been having problem with depreciation and its accounting in general. It will enable the shareholders of any manufacturing firm on enterprise to know the impact of the usage of different depreciation methods in the reported profit figure given to them by management of a company as a result, know when the management has used a the to overstate its profit figure present that notion that the company is profitable where as it may not be.
It will also enable investors to value the share of the company they will want to invest in since the management might believe that the company is as profitable and as such give a wrong value to the share of the company.
It will also be of importance to student and other who have difficulties in understanding the topic on depreciation to have glimpse of what depreciation and accounting is all about.
1.5 SCOPE AND LIMITATION OF THE STUDY
This study will be limited to the period of 1986 to 1990 (which is five years study for the purpose of easier collection of data, even thought the institution have operated for along period). This is to enable the researcher have a closer view and make a complete study of the depreciation accounting in practice in these institution. The researcher used twenty – eight manufacturing firm that existed within 1986 -1990 in order to enable her make a good sampling recently, there are more than that number of manufacturing firm in Nigeria.
Also this study will be limited to tangible assets such as plant and machinery; it will also be limited to assets which are long lived asset in the operation of a manufacturing firm this is because depreciation is associated with fixed tangible asset and not the current assets.