Depreciation

Depreciation

the fall in the value of a non-current asset. As a non-current asset is used over and over, its value drops

Lifespan

estimated useful life of a fixed asset 

Salvage/residual

the estimated value of an asset at the end of its lifespan

Net book value

historical cost of an asset subtracted by accumulated depreciation at any particular time

Accumulated depreciation

the annual depreciation expense multiplied by the number of years the asset has been used

ADV of staight line

• The ease of calculating depreciation, as the same amount is deducted each year. This means depreciation is treated as a fixed cost and does not change with the level of output or production.

• It is suitable for depreciating assets that have a known useful shelf-life and can be estimated accurately.

• It is also suitable for assets that have a consistent usage rate over the lifetime of the asset, e.g., furniture or automated machinery.

DIS of straight line

• Many non-current assets, such as motor vehicles and computers, depreciate in value the most during the initial stages of their useful shelf life. Hence, using a uniform depreciation value can be misleading and inaccurate.

• In addition, many assets do not depreciate consistently as they become less efficient over time.

Units of production

this method calculates depreciation based on the units of usage rather than time. / the depreciation expense will be higher during years when there is a greater usage

depreciation expense

the expenses that are charged to fixed assets based on how much the assets get consumed during the accounting period

Depreciation per unit formula

Depreciation per unit = Purchase cost - residual value / expected number of units over lifetime 

depreciation expense formula

 depreciation per unit * Number of units produced