At a recent luncheon, you were seated next to Mr. Fogle, the president of a local company that manufactures food processors. He heard that you were in a financial accounting class and asked:
Why is it that I'm forced to record depreciation expense on my property when I could sell it for more than I originally paid? I thought that the purpose of the balance sheet is to reflect the value of my business and that the purpose of the income statement is to report the net change in value or wealth of a company. It just doesn't make sense to penalize my profits when the building hasn't lost any value.At the conclusion of the luncheon, you promised to send him a short explanation of the rationale for current depreciation practices.
Required:
Prepare a memo to Mr. Fogle. Explain the accounting concept of depreciation and contrast this with the dictionary definition of depreciation.