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Accounting for Colin's Cars.

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Introduction

Contents Trials Balance for Colin's Cars 1 Balance Sheet for Colin's Cars 2 Profit and Loss Account for Colin's Cars 3 Letter to Colin explaining the methods of depreciation 4 - 6 Accounting Conventions 7 - 8 Bibliography 9 Reference 10 Dear Colin, Re: Depreciation methods I understand that you wish to expand your business to incorporate a hire car service. As you are aware that you need to depreciate your fleet, there are a few methods of depreciations, they are Straight Line Method, Reducing Balance Method and Sum of the Year's Digits Depreciation. Straight Line Method: This spreads the cost of the asset equally over its period of use. G Black (2000: 51) suggested to use the following formula for calculating depreciation under this method: Cost - Estimated residual value Useful economic life in years Reducing Balance Method: This spreads the cost of the asset over its period of use in a different way. More depreciation is charged in the early periods of use than in the later one. P Cahill (2001) suggested the following formula for calculating depreciation under this method: Net Book Value = Cost x (1-r)n Where r is depreciation rate (as a decimal) and n is number of year. These two methods are more commonly used I did a research on other methods on depreciation, and I found a method called ...read more.

Middle

This expense will be charged to the profit and loss account for the appropriate period. The straight line method is more suitable for leases or buildings, and it is more commonly seen to use the reducing balance and sum of the year's digit on plant, equipment and vehicles. The reason is because the use of the lease or building is likely to be constant over its life so the straight line method would be appropriate as it results in a constant depreciation charge. The reducing balance and sum of year's digits depreciation are more appropriate on vehicles. The total expense for the vehicles is made up of two elements: a depreciation expense and a maintenance expense. The maintenance charges are likely to rise as the vehicles age. In order for the total expenses to remain constant it is necessary for the depreciation charge to adopt the opposite pattern, as the vehicles are new this will be high and will decrease as the vehicles age. As you can see the result of each method, reducing balance and sum of the year's digits depreciation shows the depreciation charged in the early years is greater than that charged in the later years. These methods are more realistic as the value of the business is greater when the asset is newer. ...read more.

Conclusion

Prudence - Accountants should always be prudent when preparing financial statement. If something is in doubt, plan for the worst and, if a transaction has not yet been completed ignore any possible benefits that may arise from it. i.e. record of the doubtful debts provision. Consistency -There are a number of ways in which some concepts can be applied. Each business must choose the approach that gives the most reliable picture of the business, not just for this period. This is impossible if the approach is changed every year, the users of the financial statements cannot compare the results. Change of method can take place but if the profit calculated in that year is so affected that some users of the financial statements would take different decisions, the effect of change must be stated at an appropriate point in the financial statements. Materiality - This is the interest to those who make use of the financial statements. The financial statements must be compromised to provide a basic minimum of information upon which everyone can rely. If the financial statements could not be relied upon, they would be worthless. If they could only be relied upon by some of the user groups (i.e. customers, owner, banker etc), something else would need to be produced to provide reliable information for the others. Since the financial statements should be as objective as possible, this is the reason why the accounting concepts are introduced. ...read more.

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