Calculate the Value of an Asset
Essay Preview: Calculate the Value of an Asset
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There are several different ways to calculate the value of an asset, depending on what kind of asset it is. These four ways are valuation, depreciation, amortization, and depletion. Valuation is an estimated value of an assets worth. Depreciation is a decrease in an assets value over the course of a specified amount of time. Amortization is the reduction of the value of an asset by prorating the cost of the asset over a certain number of years. Depletion is when the gradual use of an asset like a natural resource over a period of time. Each of these methods to calculate the value of an asset is used at a different time. For example, depletion would not be used to calculate the value of a vehicle, but would be used to calculate the value of a mine. Depletion value is calculated using the units-of-activity method because depletion is generally a function of the units extracted during the year (Weygandt, Kimmel, & Kieso, 2010). Depreciation would be used to calculate the value of the vehicle mentioned in the previous example.
When calculating depreciation, it would be appropriate to calculate it using two different methods. Since there are a few different ways to calculate depreciation, this means that the values and money earned could come out differently for each method each depreciation year. The text shows a great example of this, where the delivery equipment of a floral company is depreciated over a five year period. During these five years, the depreciated value is different using each of the three depreciation methods, but, at the end of the five years, the value of the delivery equipment comes out to be the exact same amount (Weygandt, Kimmel, & Kieso, 2010).
There are four methods for calculating the value of an asset, which are depreciation, valuation, amortization, and depletion. All four of these methods are important and can be used for different assets at different times. It is important for a business to have a good accountant who knows what each of these methods are, and how to use them at the right times. There are also different ways to calculate the value when using these methods, like depreciation, so it is good to try more than one and see which will help the companys financial statements the most.