Depreciation Flashcards
What is depreciation?
it is the decrease in value of a non-current asset due to use and/or passage of time.
What are the 4 causes of depreciation?
Time Factor
Physical Deterioration
Economic Factor
Depletion
What are the 2 types of depreciation methods?
Reducing balance method
Straight line method
When would you use Straight line method?
Suited to assets that have an even use over their life.
The Spread of depreciation matches the even use
When would you use Reducing balance method?
Suited to assets that have a heavier fall in value in earlier years
Suited for assets that become out of date quickly
where repair/maintenance increase over time
What non-current assets would you depreciate using Reducing Balance method?
machinery
motor vehicle
What non-current assets would you depreciate using straight line method?
furniture
office equipment
What is the consistency concept?
if you use the straight line method for a class of asset, you should keep using that method and percentage in the future. using This concept, direct comparison between financial statements of different years can be made and the firm can monitor its performance
What is the Disposal of an asset?
When a asset is sold, destroyed or simply thrown away we need to remove it from our books
What is the Accruals concept?
The benefit achieved from using a non-current asset is matched with the depreciation for the same period
cost of non-current asset is spread over the useful life of the asset
What is the Prudence concept?
the concept in which states that estimated losses should be provided for so we don’t overstate the value of non-current assets and the profit for the year
What is the Effect of depreciation on the income statement?
Profit for the year is decreases
Expenses increase
What is the Effect of depreciation on the statement of financial position?
Non currents assets decreased
Capital is reduced
