Question

1. Explain what is depreciation to someone who doesn't know anything about accounting. How does depreciation relate with the market value of an asset like a brand new automobile.
2. What is GAAP --What does it mean? Why is it important? Does GAAP make comparing different companies possible? Name two characteristics of GAAP.

Answer 1

A. A decrese in value of any asset over time because of wear and tear. In other words, we can say that, depreciation is a non-cash expense that decline the value of an asset by using it or by age can be the reason.

Depreciation rate is decided according to income tax act and asset usage time decides that at what rate it is to be depreciated.

B. GAAP - Generally Accepted Accounting Principles.

FASB Financial Accounting Standard Board issue a common set of principles, standards and procedures which is to be followed by accountants.

Importance - By reviewing the financial statement of the company, GAAP help investors to easily evaluate the company. Also, comparison of financial statement of different time period and whit different organization is helpful for taking further decisions.

Characteristics -

1. It is relevant in nature.

2. Comparability is possible.

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