11-24-2010, 03:27 PM
By not depreciating the car actualy you are booking it as expense for the 1st year. And by expensing means we have used the car and its benefits totaly in the first year.
But you have to use the benefits of the car for 10 years. So we should divide the cost of car over 10 years. In this way we can have the right picture of the net income or benefits from the car for every year. This is also required by the Matching concept of the accounting.
There will be no effect of this yearly depreciation of 2,000 on cash and entry will be
Depreciation Expense 2,000 Dr
To Car 2,000 Cr
And this depreciation expense will resultantly decrease the profit for the year not cash etc.
But you have to use the benefits of the car for 10 years. So we should divide the cost of car over 10 years. In this way we can have the right picture of the net income or benefits from the car for every year. This is also required by the Matching concept of the accounting.
There will be no effect of this yearly depreciation of 2,000 on cash and entry will be
Depreciation Expense 2,000 Dr
To Car 2,000 Cr
And this depreciation expense will resultantly decrease the profit for the year not cash etc.
