The value adjustments

In accounting, value adjustments are a necessary tool. This is because machines depreciate in value and not all customers pay their bills.

Value adjustments are necessary

Tangible assets lose value over time due to wear and tear or age. Since accounting follows the principle of truth, regular devaluations (value adjustments) must be made to these tangible assets. These value adjustments are made on the depreciation account. It is possible to choose either direct or indirect depreciation. With direct depreciation, the reduction in value is directly deducted from the object in question, while with indirect depreciation, a separate value adjustment account is set up and the acquisition value always remains visible on the asset account.

Different methods can also be chosen when calculating the depreciation amount. It is necessary to distinguish between straight-line and declining-balance depreciation. With straight-line depreciation, a fixed percentage of the acquisition value is written off each year. The book value decreases evenly each year. If declining-balance depreciation is chosen, the book value decreases significantly in the first few years, but then less and less. Not only must value adjustments be made on tangible assets, but also on receivables. If the loss of receivables is final, the amount will be written off. Presumed losses must be estimated. The value adjustment must not be made on the accounts receivable account but on a special value adjustment account (bad debt provision). The bad debt provision contains the sum of the presumed receivable losses.