Adjustments For Depreciation

Question 1

Depreciation

Answer 1

Depreciation is used to spread the cost of an asset over its useful life

The annual amount by which the assets are depreciated is included as an expense in the statement of comprehensive income

The statement of financial position should show the historic cost of an asset, the amount it has depreciated over its life and the current value for the asset, the final figure is called the net book value (what the asset is thought to be worth at that moment in time)

Question 2

Straight Line Depreciation & Example

Answer 2

When an asset is depreciated by a set amount each year

This value is shown as an expense on the statement of comprehensive income

E.g. A ford transit cost £16,000 expected to be used for 4 years with a resale value of £4,000

£16,000 - £4,000 / 4 = £3,000 depreciation per year

Question 3

Straight Line Depreciation Formula

Answer 3

Historic Value - Residual Value / Expected Life

Question 4

Historic Cost

Answer 4

The cost of an asset when it was first purchased

Question 5

Expected Life

Answer 5

How long an asset is expected to be useful within a business

Question 6

Residual Value

Answer 6

The value of an asset when it is disposed of by the business e.g. resale value

Question 7

Reducing Balance Depreciation

Answer 7

An asset is depreciated by a set percentage of it’s remaining value each year

It involves reducing the value of the asset by a set percentage each year

This percentage is decided by a senior accountant and stated in the financial reports

Question 8

Reducing Balance Depreciation Example

Answer 8

E.g. Ford transit cost £16,000 and it depreciates 20% per year

Year 1: £16,000 x 0.20 = £3200
Net Book Value: £16,000 - £3,200 = £12,800

Year 2: £12,800 x 0.20 = £2,560
Net Book Value: £12,800 - £2,560 = £10,240

Year 3: £10,240 x 0.20 = £2,480
Net Book Value: £10,240 - £2,480 = £7,760