"DEPRECIATION."

Poverty Bay Herald, Volume XLIX, Issue 16186, 24 July 1923, Page 5

"DEPRECIATION."

GISBORNE ACCOUNTANT STUDENTS’ SOCIETY. INSTRUCTIVE ADDRESS BY MR, ‘ BALE. A particularly instructive. address cm “Depreciation” was delivered by Mi\ E. R; Bali, F.1.A.N.Z., before the Gisborne Accountant Students’ Society last evening. Mb M. J. White presided over a fair attendance; tin commending his address the speaker mentioned that, if provision for depreciation was not made by commercial firms, whether company or sole trader, the books of accounts would not exhibit (lie true financial position of the concern, therefore it was in the interests of all that the subject of depreciation should he given considerable thought. Depreciation was defined as a provision made against profits with a view to covering an expected loss. I.t was the gradual decrease in value of an asset from any cause, or (lie necessary shrinkage in value consequent upon the enjoyment ok use of same. There was a great difference between depreciation and fluctuation. In the first place depreciation recorded the decrease in value, due either to wear and tear, obsolescence, or shrinkages, whereas with fluctuation this was caused by the alteration in value due to extraneous causes. The necessity for the creation of depreciation could not he too fully emphasised. To ignore same would mean bankruptcy to the individual, through miscalculation of profits, which in its’ turn would diminish capital. Methods for providing depreciation could roughly be divided into three groups—(l) fixed instalments which allowed for a fixed proportion of the original capital value of the asset to be written off cadi year. This method could be applied in writing off (a) patent rights; (b) grazing lease; and, (c) expenditure on leasehold premises. (2) Diminishing balance method. This provided for a fixed rate to be written off each decreasing balance and could be applied against (a) plant and machinery; (b) furniture and effects; (c) axis. The principle of this method would be that, ini the first few years, the amount of depreciation would bo heavy, and the repairs light, but as time went on the reverse would be the order, and tins would tend to even up tlio charge. (3) The annuity system. By this method interest was allowed on the reducing balance, and the asset written down by fixed annual instalments. Other methods were re-valuation, sinking funds, and insurance policies. By the aid of accounts set out in detail on blackboards Mr. Ball stressed the points of the different systems. With reference to goodwill paid for leases the speaker stated that on account of the- limited knowledge concerning depreciation many a lessee paid in' rent actually, twice as much as he really thought he was. As an' illustration- the mentioned a case where £IOOO was paid for goodwill of a lease for twelve- years with no compensation for improvements. The rental charged was £3 per acre per annum and with the writing off of the goodwill of . £133 per year the actual rent paid amounted to £5 per acre per annum.

After traversing the functions of reserves, both general and secret, sinking funds, the speaker gave some concrete illustrations concerning lack of depreciation with regard to some of the local municipal ventures, and predicted that the ratepayers in the future, when the assets had to be replaced, would be burdened with higher rates to pay for acquisition of new assets and sinking funds for redemption of loans. At the end of the address several questions were asked and were answered. Two of the questions caused quite a smile in that they were really off the beaten track. One was: "Should, the wear and tear caused by sweeping streets and cleaning tram lines be provided for in municipal accounts? Following this question Mr. Todd suggested that candidates lor the next municipal election should possess qualifications that they had a sufficient knowledge of the subject of' depreciation to qualify for election to office. A hearty votei of thanks was accorded Mr. Ball, the vote, being carried by acclamation. Before the termination of the meeting Mr. White mentioned that the debating team to visit Napier in August would comprise Messrs O. A. Smith, 1. J, Quigley and M. R. Fry, and the .society wished' them the best of luck in the inter-societv debate. COMMITTEE MEETING. . The following members of the executive were present at a committee meeting held last night:—Messrs M. J. White (chairman), R. K. Gardiner, G. A. C. Ashbey, A. R. Gardiner, and M. R. Fry.—Mention was made that the; challenge cup for the debate had been donated by Mr. W. McCulloch,, of Messrs McCulloch, Butler and Spenco, of Napier and Gisborne.—The' following new members wore elected: Messrs F. J. Bowley and M. Nicolson.