Depreciation Flashcards
Define the term ‘depreciation’.
Calculating a prediction of how much an item reduces in value
Define the phrase ‘to depreciate’.
Goes down in value
What are the two methods to work out depreciation?
- Straight line method
- Declining balance method
How is depreciation worked out using the straight line method?
The initial cost - the residual cost divided by the expected life
What is the initial cost?
How much the item costs
What is the residual value?
The prediction of the value of an item in its expected life
What is the expected life?
How long the item is kept for
What are the advantages and disadvantages of the straight line method?
It’s easy and simple but doesn’t give an accurate depreciation
A pet shop buys a computer. The initial cost is £1,600. The residual value is £100. The expected life is 3 years. Calculate the annual depreciation using the straight line method.
£1,600 - £100 = £1,500
£1,500 divided by 3 = £500
= £500
The computer decreases by £500 every year
How is depreciation worked out using the declining balance method?
The depreciation (40%) of the initial cost
40% of the initial cost
Take away the answer from the initial cost
The answer is known as the book value
What are the advantages and disadvantages of the declining balance method?
More realistic with what happens with depreciation
Allows for more depreciation at the start
A pet shop buys a computer for £15,000. Work out the book value for the first year using the declining balance method.
40% of £15,000 = £6,000
£15,000 - £6,000 = £9,000
= £6,000 depreciation
= £9,000 book value
What are fixed assets or capital items?
Items that last several years and are usually expensive and therefore the loss of value of these items over time is a considerable cost to a business and are more difficult to budget for.
