Depreciation - Useful life or economic life

Depreciation is the accounting definition of a reasonable estimate, in monetary terms for the depreciation of an asset over a period of time. Since the majority of assets are capitalized in the balance sheet, in the budget, the "cost of depreciation", is provided as an expense on the income statement.

Many debates on depreciation continue in accounting circles, since it is difficult to determine what constitutes a "reasonable estimate". It was also agreed, until recently, that land and buildings can not depreciate, but appreciates. Recent developments, however, have now proposed depreciation on buildings.

Tax "write-downs" on the activities further complicates matters, since the rates prescribed by law for tax deductions are higher depreciation rates, thus creating variances between tax values ​​and book values ​​of assets.

My thesis is that accrual accounting can only be done thoroughly, with the assistance of a clever accountant. The accounting skills, on fixed asset registers, accounting and solid knowledge of tax legislation is vital.

Considering that the tax write off of assets are higher, the trend in accounting is to depreciate assets in terms of useful life, and not its economic life. The prescribed speed for a computer in tax would be three years or 33, 3%. (Depending on the country's tax regime). But a business could use it only for 6 months and sold as scrap. This provision of 100% of depreciation, such as useful life, must be taken into account in the office furniture could be used for 5 years, and then scrapped, but the tax rates could prescribe four years, to cancel a tax!

The rate that firms would devalue their activities to coincide with the economic life of an asset. So accepted economic life is the life for the business.
In not-for-profit organizations and institutions such as churches, etc., the picture becomes very confusing. Churches retain assets such as furniture up to 40 years. Even computers that businesses normally upgrade from 6 to 12 months are used for 3 or 4 years!

So not-for-profit if the method is applied to life, in the activities could have a lower depreciation rate of 2%. Expect GAAP presentation. The depreciation rates, not-for-profit organizations and other communities, must be carefully applied.

No one expects that a firm or director of a not-for-Profit Organization in order to understand these concepts, just to ensure that at least, a real asset accounting system is in place ....