Depreciation

Depreciation

Measure of the cost of the economic benefits of the tangible non current assets that have been consumed during the period

Depreciable amount

Cost of an asset less any residual value. Amount depreciated in full by the end of the estimated useful life

Carrying amount

Cost of the non current asset less the accumulated depreciation

Factors affecting depreciation

• cost of the asset

• length of the useful life of the asset

• Estimated residual value of the asset

Useful life

Estimated life of the asset for the current owner, can be defined by time or output

Residual value

The amount that is estimated the asset will be sold for when it is no longer in use by the business

Straight line method

Calculates a consistent amount of depreciation over the life of the asset

Straight line Calculation

Annual depreciation charge = cost - residual value / useful life

Diminishing balance method

Allows a higher amount of depreciation to be charged in the early years of an assets life compared to later years this reflects increased levels of usage

Diminishing balance equation

Annual depreciation charge = carrying amount x %

Dual effect of depreciation

• expense to the statement of p+l a debit to a depreciation charges account

• Requirement to create a provision for accumulated depreciation by crediting account

Provision for accumulated depreciation

Used to reduce the value of the non current asset in the statement of financial position

Carrying amount

Cost of the asset less the accumulated depreciation on the asset