Methods of depreciation

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9 Terms

1
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what is depreciation

the fall in the value of a fixed asset

2
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when is depreciation materialized

when the asset is actually sold

3
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what is scrap/residual value

the value of the fixed asset at the end of its useful life

4
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straight line method

most straightforward way to account for depreciation

spreads depreciation evenly over the useful life of the fixed assets

5
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4 advantages of the straight line method

  • ease of calculation

  • suitable for those with a known shelf-life

  • suitable for those with a consistent amount of use

  • easier to make historical comparisons

6
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3 disadvantages of the straight line method

  • may be innacurate bc many assets are used during initial stages of shelf-life

  • many assets dont depreciate consistently

  • scrap value is only an estimate for the future value of an asset

7
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reducing/declining balance method

uses a preset and fixed percent to calculate the val. of depreciation

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2 advantages of the reducing/declining balance method

  • more realistic, so more accurate values

  • suitable for assets that may not have a known shelf life and are expected to last long

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3 disadvantages of the reducing/declining balance method

  • more difficult and time consuming but still only an estimation

  • never fully reduces asset value to zero

  • finding a suitable depreciation rate is somewhat subjective and difficult