Depreciation

    Cards (11)

    • What concepts does depreciation follow?
      Accruals and cost concepts.
    • What is depreciation (reducing balance)?
      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.