3.4 Final Accounts (depreciation)

depreciation due to

wear and tear/ obsolescence

straight line method

Annual depreciation = (purchase cost - residual value)/life span

limitation staright line method

The depreciation value is not the same for every year - not a true reflection of the depreciation

Not accounting for external factors and repair cost for non current asset

advantage of straight line method

easy to calculate and understand

Units of production method 2 formula

Depreciation per unit= Purchase cost minus Scrap value /Expected number of units over lifetime

Depreciation expense = Depreciation per unit x Number of units produced

advantages of unit production method

More precise and accurate

Fair value over time

limitations of unit production method

Requires more variable (number of units produced and expected units per year)

Replying on the accuracy of the expected number of units over the life time

historic cost

purchase cost of a particular fixed asset.