The Problem and Its Background

Chapter 1

THE PROBLEM AND ITS BACKGROUND

Introduction

        Generally, the term depreciation is used to denote decrease in value but in accounting, this term is used to denote decrease in the book value of fixed asset. Depreciation is the permanent and continuous decrease in the book value of a fixed asset due to use, affluxion of time, obsolescence, expiration of legal rights or any other cause. It is concerned with charging the cost of man made fixed assets to operation. In other words, the term depreciation is used when expired utility of physical asset is to be recorded. (Garg)

Long term assets or fixed assets represent future economic benefits or service potential that will be used during business operations. At acquisition, a long term asset is recorded at its cost. As the service potential of a long term asset is consumed, the cost of the asset is allocated as an expense among the accounting periods in which the assets are used. This allocation is depreciation. Depreciation differs from most expenses in that it does not depend upon a cash payment at or near the time the expense is recorded.

        Furniture and appliances stores in Batangas City and Lipa City have long term assets. These assets are defined as items which are not for sale and have an economic life which is greater than one year. Long term asset can help furniture and appliances stores in many ways. It can make the work easier and faster while continually reducing the long term assets capacity. Therefore, the useful life of it is no longer effective to continue operating the asset.

However, depreciation only exists because it is associated with a long term asset. At the time the asset was purchased, there is a cash outflow to pay for the asset. Thus, furniture and appliances stores need to appropriate cash. Appropriation has the same understanding with reserves. Reserves in accounting is a part of retained earnings set aside for a specified purpose and, hence, unavailable for disbursement as dividends. (Reserves)

        Since this research is basically confines to the effects of long term asset depreciation to the cash appropriation of furniture and appliances stores in Batangas City and Lipa City, it is important to point out that the study revolve around the factors of depreciation of long term assets. These factors include the long term assets use in the business, methods of depreciation, as well as the reason for cash appropriation and the relationship of long term asset depreciation to the cash appropriation of furniture and appliances stores in Batangas City and Lipa City.

        As Bachelor of Science in Business Administration students, the researchers choose to study the effects of long term asset depreciation to the cash appropriation because the researchers believe that for future use, the managers of furniture and appliances stores need to set aside a certain sum of money for the maintenance or replacement of the long term assets.

Theoretical and Conceptual Framework

        According to the American Institute of Certified Public Accountants (AICPA), “Depreciation Accounting is a system of accounting which aims to distribute cost or the basic value of tangible capital assets less salvage (if any), over the estimated useful life of the unit (which may be group of assets) in a systematic and rational manner. It is a process of allocation and not of valuation. (Garg)