Depreciation

Depreciation

the annual loss of value do to use, wear, and age, and technical obsolescence or when an asset is worth less after use

What is depreciation for book keeping purposes?

an expense charged to allocate or distribute the cost or value of an asset over its estimated useful life

Asset

physical or financial property that has value and is owned by a business or individual

What are some examples of assets?

machinery, vehicles, buildings, land,

Why is depreciation important?

an attempt to accurately quantify the annual loss of value in a productive asset

What are the 3 characteristics of a depreciable asset

it must have: a useful life > 1 year, a determinable useful life but not an unlimited useful life, used in a business in order for the depreciation to be a business expense

Market value

the value for which an asset would be sold in an open-market transaction (selling a car on Kijji)

Define book value

the original cost of an asset minus the total depreciation that has been taken to date

Cost

the price paid for any asset

Useful life

the number of years an asset is expected to be used

Salvage value

the expected market value of a depreciable asset at the end of its assigned useful life. [What you estimate the price to be when its not useful anymore]

True or False? Depreciation methods are accurate representations of actual loss of value

False

The true depreciation that occurs in any given time period can only be determined by_?

knowing the true market value of the asset at the start and end of the selected time period

What are the 2 different methods for calculating depreciation?

straight line and declining balance

Describe straight line depreciation

Asset depreciation stays the same across the asset's useful life

Describe declining balance depreciation

Annual depreciation declines at an increasing rate each year. More depreciation in early years and less depreciation in late years

Straight line depreciation formula

annual depreciation= (cost-salvage value)/useful life

Declining balance depreciation formula

annual depreciation=(book value at the start of year)x(R) Where R is rate of depreciation

What is the value of R for buildings

5%

What is the value of R for machinery and vehicles

10%

What is the value of R for land and quota

0%

Partial year depreciation problem

Multiply the annual depreciation rate by the number of months it was getting depreciated/12

Define economic depreciation

the decline in value due to an asset's reduced ability to produce revenue now and in the future

Tax depreciation

is used as a deductable expense in calculating taxable income for a business. (also called Capital Cost Allowance or CCA)

Would tax depreciation or economic depreciation be trying to measure depreciation for management purposes

economic depreciation

Would tax depreciation or economic depreciation be used to reduce net (taxable) income?

tax depreciation