Depreciation and Accounting Methods Flashcards

A set of practice flashcards covering the definitions, causes, objectives, and calculations for Depreciation, as well as the differences between Straight Line and Diminishing Balance methods.

Fixed assets

Assets such as buildings, furniture, machinery, and motor vehicles that provide benefits to the business for more than one year and are not intended for resale.

Depreciation

The portion of the cost of fixed assets charged each year as an expense to distribute their cost over the years of their useful life to the business.

Normal wear and tear

A cause of depreciation arising from the usage of an asset (decrease in efficiency) and the passage of time (physical deterioration from elements like wind and sun).

Obsolescence

The loss in value of fixed assets due to the arrival of superior equipment, technological improvements, or changes in fashion, style, and market conditions.

Cost of Asset

The purchase price of an asset plus all expenses incurred before it is first put to use, including loading, carriage, installation, transportation, and assembly.

Useful Life

The expected number of years for which a fixed asset will remain operational and in use by the business.

Scrap Value

Also known as residual value or Kabari value, it is the amount at which an asset could be sold to a scrap dealer after its useful life.

Depreciable value

The difference between the cost of the asset and its estimated scrap value.

Straight Line Method

A method of charging depreciation where the amount written off as an expense is uniform for every year of the asset's useful life.

Straight Line Depreciation Formula

$$\text{Depreciation} = \frac{\text{Cost of Assets} - \text{Scrap Value (if any)}}{\text{Life of Assets}}$$

Rate of Depreciation Formula

$$\text{Rate of Depreciation} = \frac{\text{Annual Depreciation Amount}}{\text{Cost of Asset}} \times 100$$

Fixed Installment Method

Another name for the Straight Line Method, referencing that the depreciation amount remains a fixed installment every year.

Diminishing Balance Method

A method where depreciation is calculated as a fixed percentage of the diminishing value (book value) of the asset at the beginning of each year.

Written down value method

An alternative name for the Diminishing Balance Method or Reducing Balance Method.

Equal Burden on Profit & Loss Account

A merit of the Diminishing Balance Method where the combined cost of depreciation (which is high in early years) and repairs (which are low in early years) remains somewhat equal over time.

Book Value at End of Life (Straight Line)

Under the Straight Line Method, the book value of an asset is reduced to zero or its net scrap value at the end of its useful life.

Book Value at End of Life (Diminishing Balance)

Under the Diminishing Balance Method, the value of an asset is never reduced to zero, even if there is no scrap value.