What is a Balance Day The Last day of Accounting Year Example: 31 March 20XX
What is Depreciation Depreciation is specifically defined as the systematic allocation of the depreciable amount of an asset over its useful life.
Remember The depreciable amount of the asset is its cost less residual value. Residual value is the amount the business thinks it might receive at the end of the assets useful life when it sells the asset
Important notes Depreciation is a measure of the use of an asset (consumption of future benefit). Depreciation is a method of allocating cost - to recognise use of the asset Depreciation is based on historical cost When accumulated depreciation is subtracted from the historical cost of the asset the result is called the carrying amount
Methods and when to use Straight line depreciation Is used when the pattern of usage of an asset and the contribution it makes towards generating revenue occurs evenly throughout its useful lifetime Is often based on a percentage applied to cost with the assumption that the residual value is taken as zero
Straight line Method Depreciation: Cost – Salvage value Useful life of the asset
Diminishing value Is used when assets wear out quickly or are likely to contribute more to revenue in the earlier years of their useful life
Units of use method Is used when an assets life can be readily measured in units, for example hours, kilometres, and the asset’s use may vary from period to period
Depreciation : (Cost – Residual Value) X Usage in the year Estimated total usage Units of Use method
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