Depreciation

Straight-line depreciation Formula

(Historic value - Residual value) / Expected life

Depreciation is an accounting concept used to...

Depreciation is an accounting concept used to spread the cost of an asset over its useful life. - It is important that when fixed assets are shown in the balance sheet, that they are given a realistic value. - This means that they are depreciated on an annual basis.

Reducing balance method

The reducing balance method involves reducing the value of the asset by a set percentage each year. - The percentage is decided by a senior accountant and stated in financial reports.

Straight-line depreciation decisions

An accountant then has to make a few decisions: 1. How long the asset is expected to be useful to the business, i.e. it's expected life. 2. At the end of its useful life, how much it might be worth if sold on, i.e. its residual value.

Reducing balance method - Example: If a Ford transit cost £16,000 and a decision was made to depreciate it by 20% per year, the depreciation would be calculated as:

Historic cost = £16,000. Year 1 depreciation: £16,000 x 0.20 = £3,200. Net book value: £16,000 - £3,200 = £12,800. Year 2 depreciation: £12,800 x 0.20 = £2,560. Net book value: £12,800 - £2,560 = £10,240

The amount by which the asset has depreciated is included in the expense section of the...

The amount which the asset has depreciated is included in the expense section of the profit and loss account. - The balance sheet shows the historic value of the asset, the amount by which it has depreciated over its life and then a current value for the asset. - This figure is called the net book value and represents what the asset is thought to be worth at that moment in time.

Straight-line depreciation

The straight line method involves reducing the value of an asset from the price paid (its historic cost) by a fixed amount each year.

How to calculate depreciation

Two ways to calculate depreciation: - Straight-line depreciation: An asset is depreciated by a set amount each year. - Reducing balance depreciation: An asset is depreciated by a set percentage of its remaining value each year.