Depreciation

Question 1

Define depreciation

Answer 1

Process of reducing the book value of a tangible fixed asset due to:
- Use
- Wear n tear
- Passing of time
- Obsolescence

Question 2

Capitalisation

Answer 2

Process of recording a cost as a fixed asset in the balance sheet rather than an expense in the income statement

Question 3

Types of depreciation models

Answer 3

• fixed line depreciation
• accelerated variable depreciation - where expense to income statement is higher in earlier years
• units of production method, where depreciation matches the use of your product

Question 4

How to capitalise an asset

Answer 4

How to capitalise an asset:
- Use journal entries
- Cash is credited by 8k
- Debit baking equipment (an asset) by 8k
Then have to account for depreciation after a year/month whatever the timescale
- Depreciation expense increases by 800, so debit by 800
- Credit accumulated depreciation by 800
- So baking equipment and accumulated depreciation are both assets in the balance sheet, so since AD is a contra asset, 8000-800 = 7200, the net value of equipment now.

Question 5

Depreciation per time unit is

Answer 5

Asset cost - residual value x (1/useful life)