Nature of depreciation
What is depreciation?
The term depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life or life expectancy.
What is straight-line depreciation?
Straight-line depreciation is a simple method for calculating how much a particular fixed asset depreciates (loses value) over time.
What is the Reducing Method of Depreciation?
The reducing balance method of depreciation results in declining depreciation expenses with each accounting period. In other words, it charges depreciation at a higher rate in the earlier years of an asset. The amount of depreciation reduces as the life of the asset progresses.
Why do we charge depreciation?
To match the cost of using an asset to the revenue it helps to generate.
Formula for straight-line depreciation?
Depreciation = cost of fixed asset-salvage value/ useful life
What is the formula for the Reducing Balancing Method?
Depreciation= Net Book Value (NBV) x Depreciation
NOTE: The NBV, which decreases each year, is the asset's original cost minus its accumulated depreciation.
What accounting principle supports depreciation?
The matching (accrual) principle.
What if asset purchased for 6 months?
Half-year’s depreciation is charged.
Which gives higher depreciation in early years: Straight line or Reducing Balance?
Reducing Balance method.
What effect does depreciation have on an asset’s book value?
It reduces the non-current asset
State one Advantage of Straight line method
It is easy to understand ,calculate and apply.
What is depreciation year 2 ( carrying=$48,000)?
48,000 × 20% = $9,600
Depreciation is often described as a non-cash expense.
Explain what this means and how it still affects both the income statement and the balance sheet.
The income statement, by reducing profit (as an expense).
The balance sheet reduces the amount of the non-current asset through depreciation.
The business buys a $2,000 HP laptop that won’t be useful after five years, and that its estimated salvage value—how much you think you can sell it for in five years—is $500. (Five years is the period over which you have to depreciate computers.)
Determine the straight-line depreciation for the HP Laptop
Annual depreciation = ($2000 - $500) / 5 years
= $1,500 / 5 years
= $300
According to straight-line depreciation, your HP Laptop will depreciate $300 every year.
Cost $60,000, rate 20%. Depreciation year 1?
60,000 × 20% = $12,000