CHAPTER ONE

INTRODUCTION

Depreciation is one of the most controversial and troublesome areas in accounting.

Depreciation was actually a cost of doing business. Business executive tended to view depreciation as a matter of setting aside something during prosperous periods for the replacement of depreciable assets. When earnings are high, large amounts of depreciation might be recorded and when earnings were low or less provision for depreciation was recorded. Today, it is universally agreed that depreciation is an expenses that must be recorded whether or not revenue is sufficient to absorb it.

Depreciation has been given different interpretations and meanings by various authors and experts in the accounting field as a result many definitions of depreciation exist as many as the authors and experts themselves.

Some of the numerous definitions of the term depreciation as defined by many authors will be examined.

        The institute of chartered accountant of Canada defined depreciation as a proportionate charge of an expanse to an accounting period based the cost as other recorded value of fixed assets. Himmed Clan (third international congress on accounting defined depreciation as the price spreading the value of a fixed asset.

Montgomery (auditing theory and practice) defined depreciation as an allocation of the entire cost of depreciable assets to the operating express of a series of fiscal period.

The American Institute of Certified public Accountants defined depreciation accounting as a system of accounting which aims to distribute the cost or other basic value (if any) over the estimated useful life of the unit which may be a group of assets in a systematic and rational manner.

Depreciation is a part of the cost of a fixed asset is not recoverable on disposal and is this part of the cost of fixed assets consumed during its period of use by the firm. It is an expense, which is charged to the profit and loss account of a period before ascertaining the real net profit or loss of an enterprise.

Depreciation is sometimes divided into two classes:

INTERNAL DEPRECIATION:

Internal depreciation which arises from the operation of any cause natural to or inherent in the asset itself for instance, wear and tear of plant and machinery.

EXTERNAL DEPRECIATION:

External depreciation which arises from the operation of forces apart from the assets itself for instance obsolescence, inadequacy and decay.

Depreciation according Walter Mergs is that portion of the cost of fixed assets that is deductible from revenue for the asset services used in the operations of the business. In practice, the term depreciation is used to describe the cost of the expired services of tangible fixed assets.

1. STATEMENT OF THE PROBLEM.

Most people are not aware of the resultant effect of adopting one depreciation method or another on the reported profits and in the net book value of assets stated in the financial statement of a business concern and so they tend to pass erroneous judgment on the profitability or performance comparison between companies by mere looking at either reported profit in the financial statement. It is therefore imperative that research be conducted to find the following problems:

1. How to determine the probable use life of an asset.
2. How to estimate the depreciation amount to be charged over its useful life.
3. What is appropriate depreciation method to be used?
4. Whether the use of varied depreciation methods by concerns of assets stated in the balance sheet at the year-end.
5. Whether the amount carried in the account of property plant and equipment and hence the depreciation charges should be reviewed periodically in the line with inflation. These are burning problems, which the researcher would find arises to.

1. OBJECTIVES OF THE STUDY.

The general objectives of the work are to assess depreciation accounting practices and profitability of selected SMEs in Port harcout

1. To find out what influences company’s chance of depreciation methods.
2. To find out what impact depreciation has on the company’s profitability and tax.
3. To find out other significance depreciation has on the company’s financial statement.
4. To ascertain whether proper treatment is given to depreciation accounting by the companies studied.
5. To look into the records kept in respect of plant machinery and equipment in order to secure effective control over them through proper accounting.
6. Make recommendations based on finding thereof.

1.4   HYPOTHESIS FORMULATION

For the purpose of the following hypothesis will test on generalization of the impact of different methods of depreciation on the profitability of a company.

H0    The different methods of depreciation do not have an impact on the profitability of a company.

H1    The different methods of depreciation have an impact on the profitability of a company.

H0    Depreciation does not have any impact on management decisions.

H1    Depreciation has an impact on management decisions.

1.5   THE SIGNIFICATION OF STUDY.

1. This project will be useful to many companies in Nigeria in that it many companies in Nigeria in that it will provide an in sign into the effect of depreciation in income statement.
2. it enables the determine the extent to which depreciation could help to
3. Build funds for the replacement of their asset at the end of the existing asset useful life.

B     Reduce tax payable to the government by reducing the company’s profit.

1. The study will also prove useful to the shareholder in that depreciation reduces the declared profit a nd the amount payable as dividend to shareholders. It has the advantage of not affecting the company’s working capital as other expense do.
2. Both the federal and state government will benefit from this study since depreciation determines the volume of the company’s profit and the amount of tax payable to the government.

The study will also portray the reason. Why our also tax law disallow depreciation, but instead provide capital allowance for the purpose of computing income tax.

1. The study  will hopefully be useful to other researchers, in that it will add to the existing literature in the subject.
2. Finally the project will be useful to the researcher, in that it is presented in partial fulfillment for the award of diploma in accountancy.

1.6 THE SCOPE OF THE STUDY

The project covers the depreciation accounting practices and profitability of selected SMEs in portharcourt. It includes the impact of depreciation accounting on income statement reporting in perspective.

1.7   LIMITATIONS OF THE STUDY

In a study of this nature, a lot of limitation is bound to occur. It will be left to the researcher to strive to achieve the list he could inspite of this limitation:

They are as follows:

a.    In adequate information was a limiting factor on the extent to which the researcher could go on this study.

  b.   Residual Value:      

This could be called savage value or scrap valued by some authors and experts it is the estimated future disposal value of an asset I disposal may occur before the asset is physically worn out and such asset will therefore still have  some value before that which the accountant should try to estimate.  It is the value an article or asset posses for use other than to which it has already been devoted and not for resale this value can be also be amount which can reasonably be expected to be   realized upon the retirement of a fixed asset.

c.     Estimated Use Life:       

This is the period of time the fixed asset is expected to be effectively used in the operation or activities of an enterprise this is the period beyond which it does not pay to either keep the asset in use either by repair or any other means it is the total number of services unit which may be measured in terms of years the asset is expected to be used or unit expected to be produced etc. form an assets.

The following relevant information should be considered when computing the estimated useful life of an asset.

1. Past experience with similar assets
2. The assets present condition
3. The enterprises repair and maintenance policy
4. Current technology and industrial trends
5. Local technology and industrial trends.

d. Depreciable Cost:          

This is the cost of an asset less its residual value. The cost of an asset means the purchased prices incurred in acquiring an asset that is original cost when the estimated residual value of an asset is dedicated from this cost that result will be depreciable cost of that asset i.e. the cost on which depreciation base since it is the cost of the asset service that would be used by a given enterprise in computing depreciation charge it is usually  less than the original investment in the asset.

e. Repair:    According to bulletin “F” of the U.S bureau of internal revenue repairs is defined as disbursement which neither materially adopt up to the property nor appreciably prolong its life but merely keep it in an ordinarily efficient operating condition.

f.  Accumulated Depreciation:   This is  a compilation at any point in time of the original cost already written off as expense. In effect it show by how much the asset has fallen in value the net book value is the original cost less accumulated depreciation and this is the value recorded at the end of the  accounting period in the balance sheet.

g. Profitability:   In the purpose of this project profitability will be taken to be concerned with the profit and loss account which shows the earnings of a company form its activities during the year and the balance sheet which shows that financial position of the company as at the end of the accounting or financial year.

REFERENCE

Kermit D Larson 1992 P 446 Financial Accounting Richard Iwrin Inc

Theodore Long Cost Accountants Handbook New York the Ronald Press

Company (1956)P 1195

Afolabi Soyode P 260 Financial Accounting Principles and Practice F & A

Publishes Us

Walter B Mergs (MC Gran Hill Inc 1978) P520 Intermediate Accountancy.