Topic Four, Part 14 - Depreciation Flashcards
What is depreciation?
Takes into account fixed assets being worth less over time
How can depreciation be used for accounts to be more accurate?
The cost of the asset is spread over its life
What is net book value?
the cost of the asset minus accumulated depreciation
What affects the life of an asset?
- Amount of usage
- Whether the product is future proof
What is accumulated depreciation?
The total depreciation of the asset so far
What is residual value?
What the asset could be sold for at the end of its useful life
What is historic cost?
the initial cost of the asset
What is the straight line method?
An equal amount of depreciation is taken of annually
What is the formula for a straight line method?
(Initial cost – residual value) / life of an asset
What are some advantages of straight line method?
Deprecation is lower in first few years meaning profit appears higher
What are some disadvantages of straight line method?
- Estimating residual value can be difficult
- Lower depreciation in the first few years can be misleading
What is Reducing (declining) balance?
The asset is reduced by a constant percentage annually
What are the advantages of Reducing (declining) balance?
- More realistic
- residual value isn’t required.
What are the disadvantages of Reducing (declining) balance?
- Higher level of depreciation means asset value is lower on balance sheets.
