Depreciation Flashcards
Historical cost
The cost of the asset when it waas purchased.
Depreciaition
The procees of allocating the cost of a non current asset over uts useful life.
Useful life
The estimated period of time for which the NCA will be used (by the current entity) to earn / generate revenue (usually meausred in years)
Residual value
The estimated value of the NCA at the end of it s useful life.
Formula for straight line depreciation
(Historical cost - residual value) / Useful life
Carrying value
Historical cost - accumulated depreciation
The economic benifit of ano current asset that is yet to be consumed / allocated as an expense, plus the residual value.
Reducing balance depreciation
Depreciation rate * carrying value = $ depreciation for the year
How to choose the most appropriate method of depreciation
If the asset is likely to contribute the the generation of revenue evenlo over its life then the straight line method should be used
If the asset is likley to contribute to the generation of revenue unevenly then the reducing balance should be used (Ie if the machine has many moving parts and is likley to break down lots)
