Depreciation

Deprecitaion:

• An expense in income statement

• Matching cost of asset to revenues asset helps to generate each year

• Amount of asset used up in generating yearly sales

• To calculate you need:

  • Cost of asset

  • The useful life of asset

  • Residual value (scrap value)

  • Choice of depreciation method

• Methods of depreciaiton:

  • Straight line (SL):

    • Equal annual charge to income statement

    • Widely used, easy to calculate/understand

    • Especially used where assest depletion is similar each year

    • (cost - residual value) / life of asset (years)

  • Reducing balance (RB):

    • Produces highest depreciation charge in the first year

    • Each subsequent years depreciation gets less and less

    • Apply RB rate (will be given) to net Book value at the start of the year

  • Sum of Digits (SoD)

    • Less common but similar depreciation schedule to reducing balance

    • ((Cost - residual value)/ sum of digits) x life at start of year

  • Units of Service (UoS)

    • Depreciation charged is directly related to the assets use (i.e hours used or units made ect)

    • More you use asset in a particular year the higher depreciation charged

    • Problem - estimating actual use in advance

    • (cost- scrap) x (use in year/total use)

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