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.
Related Terms
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
- Investopedia: What is Depreciation?
- AccountingTools: Understanding the Profit and Loss Statement
- The Balance: An Overview of Accounting Periods
Suggested Books for Further Studies
- “Financial Accounting: An Introduction to Concepts, Methods, and Uses” by Roman L. Weil, Katherine Schipper, and Jennifer Francis
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Accounting for Managers: Interpreting Accounting Information for Decision-Making” by Paul M. Collier
- “Principles of Accounting” by Belverd E. Needles, Marian Powers, and Susan V. Crosson
Accounting Basics: “Appraisal” Fundamentals Quiz
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