Connor Harnedy

AcF 212 Coursework 1

a) The income and expenditure approach to depreciation is used by traditionalists. Depreciation is allocated on an accrual accounting basis through this approach. In terms of conceptual primacy, in the case of income and expenditure, depreciation is charged as an expense relating to an asset which is being used by the business to mimic its actual depreciation in value. The main two types of depreciation used from an income and expenditure point of view include straight line depreciation and reducing balance depreciation. Straight line charges an equal expense to the business every period, reducing the value of the asset, down to a scrap value. Reducing balance involves applying a fixed rate of depreciation to an asset, meaning it has a reducing value as the periods go on. A key accounting principle is what is called ‘going concern’ which depicts that accountants are to treat the business as if it will never cease to trade and accounting for depreciation in the way described previously satisfies this. b) The asset and liability approach to depreciation is used by the standard setters in the IASB. In terms of conceptual primacy, people who agree with this approach believe that depreciation is the change in value of an asset within a given period. They therefore believe that assets should be re-valued each period and that the new value should be recorded in the balance sheet, as opposed to charging a depreciation expense value in the profit and loss account based on the cost price of the asset. In fast moving economies or countries which have a high fluctuation in inflation this method of accounting for depreciation makes more sense as countries such as Argentina which have a large number of natural resources as the inflation rate in Argentina last year was 10.9% but has been as high as 20,262% in April 1990