Depreciation

What is Depreciation?

Defined as a reduction in the value of an asset that occurs over time as the asset gets old. Involves tangible assets (e.g. an asset that can be seen and touched) that are usually human-made, NCA that wear out/become obsolete over time and eventually replaced

Causes of Depreciation

1. wear and tear

2. technical obsolescence - no longer useful because of the introduction of new technology (e.g. computer/software or Windows XP)

3. Commercial obsolescence - fall in demand for goods that the asset was used to produce (e.g. sat navs (GPS systems) or CDS

Nature of Depreciable Asset

AASB 116 Property, Plan and Equipment states that a depreciable asset is a tangible asset that is held for us in the production or supply of G+S, for rental to others or for administrative purposes. It is expected to be used for more than one accounting period and has a physical presence

Cost of a Depreciable Asset

AASB 116 Property, Plant and Equipment states that the cost of a depreciable asset includes, before GST, the purchase price, cost of transporting to the business premises, and the cost of setting it up. Can also include any permanent improvement made.

Accounting definition of Depreciation

The allocation as an expense, of the depreciable amount of an asset, over its useful life. It is an estimate and cannot be recorded with 100% accuracy

What can Straight line method also be known as?

fixed instalment or on cost method

What is reducing balance method also known as?

diminishing balance method

What is Straight line depreciation?

suitable for assets that have even wear and tear over their useful life (e.g. office furniture or fixture & fittings). This method is best rated for those assets, which provide equal benefit to the business for each year of their useful lives

What is reducing balance method?

Suitable for assets that have heavy wear and tear over their useful life (e.g. delivery van/truck or plant and equipment). This method is very useful for calculating depreciation on assets, which produce more income for the business at the start of its life