Depreciation Flashcards
What is depreciation ?
Assets are considered to be worth less over time
What does net book value mean ?
Original cost - The depreciation ( what it is worth after )
What does the life of an asset mean ?
The demand of a product or machine after usage / wear and tear are considered
What is accumulated depreciation ?
Addition of depreciation each year
What is residual value ?
Value of the asset at the end of its life
What is historical cost ?
Initial cost of the asset seen as the historic cost
What is the straight-line method of depreciation ?
The cost of the asset is equally spread over its life
What is the equation for straight-line method ?
Initial cost - residual value / life of asset
What are the advantages of straight-line method ?
Amount of depreciation in first years is lower
Higher level of value on the balance sheet ( value is higher of B )
As less is deducted for depreciation , profit is higher in early years
What are the disadvantages of straight-line method ?
Hard to estimate the residual value / life of asset is not always true
Life of asset is not always known - lower depreciation in early years can be misleading
What is the reducing balance method of depreciation ?
Uses a constant % rate of depreciation each year
Higher amount of depreciation deducted in the early years of the asset ( realistic )
What are the advantages of Reducing balance method of depreciation ?
More real value of asset given , especially for certain assets like cars , planes , phones etc …
No estimate of the residual value is needed
What are the disadvantages of reducing balance method ?
With higher levels of depreciation in early years , value of asset is lower on the balance sheet
Lower value of assets means it is harder to borrow against assets
