Depreciation is the loss of value of a non-current asset over a time period.
What is straight line depreciation?
Straight line depreciation is when a fixed percentage is written off the original cost of an asset annually.
What is diminishing balance depreciation?
Diminishing balance depreciation is when a fixed percentage is written off the reduced balance (carrying value) annually. Residual value is not needed.
What is residual/scrap value?
What the asset with be worth at the end of its useful life.
Depreciation charge formula (straight-line method)
(Cost - residual value) / useful life
Depreciation charge formula (diminishing method)
Carrying value X depreciation rate %
Where is depreciation in the financial statements?
Depreciation is shown under the expenses category in the income statement.
Why do assets depreciate?
Wearing out throughout use
Passage of time
Using up
Economic reasons e.g. new design of machine is more efficient.
What is net book value?
Net book value is the cost minus provision for depreciation.
Suitability
• straight line method - best used for non-current assets likely to be kept for all of their expected life.
• reducing balance method - best used for non-current assets which are not kept for whole expected life which depreciate in more early years.