Appraisal

Appraisal is a method of depreciation that values an asset at the beginning of an accounting period and again at the end. Any diminution in value is charged as an expense to the profit and loss account.

Definition

In accounting, appraisal refers to a method of depreciation where an asset’s value is evaluated at the beginning of an accounting period and re-evaluated at the end. Any reduction in the asset’s value over this period is recorded as an expense in the profit and loss account. This method provides a way of quantifying the wear and tear or other reduction in value that an asset suffers over a specific period.


Examples

Example 1: Machinery

A manufacturing company purchases machinery for $100,000 at the start of the accounting year. At the end of the year, the machinery is appraised and valued at $90,000. The diminution in value ($10,000) is then charged as a depreciation expense in the profit and loss account for the year.

Example 2: Real Estate

A business owns a piece of commercial real estate valued at $500,000 at the start of the fiscal year. At the end of the year, an appraisal finds its value to be $480,000. The $20,000 loss in value is recorded as a depreciation expense.

Example 3: Vehicles

A delivery company uses vehicles that were initially bought for $50,000. Over the course of the year, these vehicles depreciate in value. The appraisal at year-end values them at $42,000. The $8,000 difference is recorded as a depreciation expense in the profit and loss account.


Frequently Asked Questions

What is the primary purpose of an appraisal in accounting?

The primary purpose is to accurately reflect the current market value of an asset and quantify any diminution in value as an accounting expense.

How frequently should appraisals be performed?

Appraisals are typically conducted at least annually at the beginning and end of the accounting period but may be performed more frequently if necessary.

Who performs the appraisal?

Appraisals are usually performed by qualified and independent appraisers who have expertise in evaluating the type of asset in question.

Are appraisal costs considered part of the asset’s cost?

No, the cost of obtaining an appraisal is expensed as incurred and not included in the asset’s value.

Can intangible assets be appraised?

Yes, intangible assets can be appraised, but the methods used for valuing intangibles may differ from those used for tangible assets.


Depreciation

A method of allocating the cost of a tangible asset over its useful life.

Accounting Period

A span of time at the end of which accounting transactions are summarized, usually a fiscal quarter or year.

Profit and Loss Account

A financial report summarizing the revenues, costs, and expenses incurred during a specific period.

Amortization

The process of expensing the cost of an intangible asset over its useful life.

Book Value

The net value of an asset recorded on company ledgers.


Online References

  1. Investopedia: What is Depreciation?
  2. AccountingTools: Understanding the Profit and Loss Statement
  3. The Balance: An Overview of Accounting Periods

Suggested Books for Further Studies

  1. “Financial Accounting: An Introduction to Concepts, Methods, and Uses” by Roman L. Weil, Katherine Schipper, and Jennifer Francis
  2. “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
  3. “Accounting for Managers: Interpreting Accounting Information for Decision-Making” by Paul M. Collier
  4. “Principles of Accounting” by Belverd E. Needles, Marian Powers, and Susan V. Crosson

Accounting Basics: “Appraisal” Fundamentals Quiz

### What is the primary purpose of an appraisal in accounting? - [ ] To determine the sales price of an asset. - [x] To accurately reflect the current market value of an asset. - [ ] To establish the production cost of an asset. - [ ] To assess the historical cost of an asset. > **Explanation:** The primary purpose is to accurately reflect the current market value of an asset and quantify any diminution in value as an accounting expense. ### How often should appraisals typically be conducted? - [ ] Monthly - [x] Annually - [ ] Biannually - [ ] Every five years > **Explanation:** Appraisals are typically conducted at least annually, particularly at the beginning and end of the accounting period. ### Who usually performs an appraisal? - [ ] The asset owner - [ ] Company executives - [ ] Accountants - [x] Qualified and independent appraisers > **Explanation:** Appraisals are usually performed by qualified and independent appraisers who have the necessary expertise in evaluating the specific type of asset. ### Are appraisal costs included in an asset's value? - [ ] Yes - [x] No - [ ] Only if the asset is newly purchased - [ ] Sometimes > **Explanation:** The cost of obtaining an appraisal is expensed as incurred and not included in the asset's value. ### Can intangible assets be appraised? - [x] Yes - [ ] No - [ ] Only if they are tied to physical assets - [ ] Only with special permission > **Explanation:** Yes, intangible assets can be appraised, but the methods used to value them may differ from those for tangible assets. ### What document records the diminution in value for an asset? - [ ] Balance Sheet - [ ] Cash Flow Statement - [x] Profit and Loss Account - [ ] Equity Statement > **Explanation:** The diminution in value is recorded as a depreciation expense in the profit and loss account. ### Which of these is a related term to appraisal in accounting? - [x] Depreciation - [ ] Revenue - [ ] Equity - [ ] Gross Profit > **Explanation:** Depreciation is closely related to appraisal as it involves the reduction in value of an asset over time. ### What term describes the net value of an asset in the company's ledgers? - [x] Book Value - [ ] Fair Market Value - [ ] Depreciated Value - [ ] Cost Value > **Explanation:** The term that describes the net value of an asset recorded on company ledgers is known as the book value. ### What is the main difference between appraisal and amortization? - [ ] Method of calculation - [ ] Types of assets evaluated - [ ] Expense recording frequency - [x] Asset types involved > **Explanation:** The main difference is the types of assets involved—appraisals often involve tangible assets, while amortization applies to intangible assets. ### When are appraisals particularly useful? - [ ] When buying new properties - [ ] At the end of the fiscal year for internal review - [ ] For merging businesses - [x] All of the above > **Explanation:** Appraisals are useful in various scenarios including buying new properties, end-of-year evaluations, and mergers.

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Tuesday, August 6, 2024

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