Depreciation

depreciation

The fall in the value of a fixed asset over time, mainly due to wear and tear (usage) and obsolescence.Failing to account for depreciation will result in the firm’s non-current assets being over-valued.

Straight-line depreciation

a method of spreading the purchase costs of fixed assets over their useful lifespan.

lifespan

estimated useful life of a fixed asset

residual / salvage value

estimation of the disposal value at the end of the lifespan

Accumulated depreciation

the annual depreciation expense multiplied by the number of years the asset has been used

net book value

original cost of asset - accumulated depreciation

Straight line

Annual depreciation = purchase cost - residual value / lifespan

units of production method

an accounting method that depreciates an asset based on its usage or output, rather than the passage of time

Units of production: depreciation expense

Depreciation expense: depreciation per unit * Number of units produced 

Units of production: depreciation per unit

Depreciation per unit = Purchase cost - residual value / expected number of units over lifetime