CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF STUDY

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, like the small and medium scale enterprises in Nigeria. the research topic aimed at discussing the depreciation of accounting practices and profitability of selected SMEs in portharcout.

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.

 

1.2 STATEMENT OF 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 most of the small and medium scale enterprises by mere looking at either reported profit in the financial statement.

 

 

 

 

 

 

1.3 RESEARCH QUESTION

It is therefore imperative that research be conducted to find the following Questions:

1. what is the effect of imparliament charge on assets?
2. What is the effect of acumulated depreciation on SMEs in portharcout?
3. Does good accounting practices have significant effect on the rate of profitability of SMEs in portharcout?
4. Does accumulated depreciation have significant effect on the performance of the SMEs in portharcout?

 

1.4 RESEARCH HYPOTHESIS

H₀: accumulated depreciation have no significant effect on the performance of SMEs in portharcout

H₁: accumulated depreciation has significant effect on the performance of SMEs in portharcout.

H₀: imparliament charges have no significant effect on assets

H₁: imparliament charges have a significant effect on assets

 

 

1.5 AIMS AND OBJECTIVES OF STUDY

The aims of the research work kis to determine:

1. The effect of imparliament charge on assets.
2. The effect of acumulated depreciation on SMEs in portharcout.
3. The effect of good accounting practices on the rate of profitability of SMEs in portharcout.
4. The effect of accumulated depreciation on the performance of the SMEs in portharcout.

1.6 SIGNIFICANCE OF STUDY

The research work will discuss the effect of imparliament charges on assets and how it affect the small and medium scale industries, it will also look at the effect of accumulated depreciation on the performance of small and medium scale enterprises and finally it will discuss effect of good accounting practices on the rate of profitability of SMEs.

1.7 SCOPE OF STUDY

The research work is limited to the study of the depreciation accounting practices and profitability of selected SMEs in portharcourt.

1.8 LIMITATION OF STUDY

FINANCIAL CONSTRAINTS: the researcher was with limited funds and can not visit all the areas in porthacourt but the reseacher was able to get meaninful information concerning the research topic.

TIME CONSTRAINTS: the researcher was with limited time due to his or her involvement in other departmental activiities like the presentation of seminars and other assignment but the researcher was able to meet up with time allocated for the completion of the research work.

 

1.9 DEFINITION OF TERMS

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.

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.

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.

 

 

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