Reporting Financial Position And Performance 2 Flashcards
What is the definition of depreciation?
Allocating the cost of tangible non-current assets over their useful lives
A measure of the portion of a tangible non-current asset’s cost consumed during a reporting period
What is historic cost?
Original purchase price
It is the basis for calculating depreciation.
What does residual value refer to?
Estimated value at the end of the useful life.
What is net book value?
Asset cost after deducting accumulated depreciation.
How does accumulated depreciation affect an asset?
Increases annually and reduces the asset’s carrying value.
What is amortisation?
Similar to depreciation but for intangible assets.
What is the formula for the straight-line method of depreciation?
Depreciation = (Cost - Residual Value)/Useful Life.
What type of depreciation does the straight-line method provide?
Uniform depreciation amount annually.
Calculate the annual depreciation for a machine costing £78,124 with a residual value of £2,000 over 4 years.
£19,031/year.
What is the formula for the reducing balance method of depreciation?
Depreciation = Net Book Value × Fixed Rate (%).
How does the reducing balance method affect early years’ depreciation?
Higher depreciation in earlier years.
Calculate the depreciation for Year 1 and Year 2 for a machine costing £78,124 with a 60% fixed rate.
Year 1: £46,874; Year 2: £18,750.
What is a key advantage of the straight-line method?
Simpler, consistent.
What is a key advantage of the reducing balance method?
Reflects faster early-life depreciation.
What are irrecoverable debts?
Debts written off when deemed uncollectible.
