depreciation methods in accounting?

Question

Is it ethical for a company to assume assets are in use on the first day of the following month after they are purchased when computing depreciation? For example, if assets were purchased Feb. 8, but they are recorded in use starting March 1. I know the previous rule for depreciation assumes all assets are in use on the first day of the month closest to the purchase date. I didn't know if it was okay to do it the following month or not? Also, if assets were assumed in use on the following month, would this increase the profit margin?

Answer 1

It all depends on the accounting policy the co. wants to adopt. Some start depreciating in the month of purchase, some start from the next month, some start from the mth of purchase only if the asset was purchased before the 15th of the mth, and from the next mth if purchased after the 15th. Any policy other than starting from the day the asset was put to use would be "inaccurate", but the error would very probably be immaterial, that is why auditors accept all of these policies.

Coming to your 2nd question, yes, if you start depreciating from the next mth, you'd increase your profit but the increase would not be material. Also, most companies compensate for this by adopting the policy of recognising depreciation for a full mth in the mth the asset is scrapped or sold. So over the life of the asset, the under-depreciation at the beginning is offset somewhat by the over-depreciation at the end. Similarly, if a co. chose to start depreciating in the mth of purchase, they'd stop depreciating in the mth BEFORE the asset is scrapped or sold.

Ultimately, all this is based on the assumption that whatever error there might be would be immaterial. This is not an unreasonable assumption. The important thing to note is that you must apply this uniformly to all assets. A policy is a policy and must be applied consistently.