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    Depreciation

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    Arshad Chaudhary
    Depreciation is the allocation of the cost of non-current assets over their useful economic lives. It matches the expense of using the asset with the revenues it generates. Depreciation is calculated using the straight-line or diminishing balance method. Under straight-line, an equal amount is expensed each year, while diminishing balance takes a higher percentage of the reducing net book value each year. Depreciation is a non-cash expense used to reflect the expired portion of the asset on the income statement in accordance with matching and prudence principles.

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    Depreciation

    Uploaded by

    Arshad Chaudhary
    43 views25 pages
    Depreciation is the allocation of the cost of non-current assets over their useful economic lives. It matches the expense of using the asset with the revenues it generates. Depreciation is calculated using the straight-line or diminishing balance method. Under straight-line, an equal amount is expensed each year, while diminishing balance takes a higher percentage of the reducing net book value each year. Depreciation is a non-cash expense used to reflect the expired portion of the asset on the income statement in accordance with matching and prudence principles.

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    Depreciation is the allocation of the cost of non-current assets over their useful economic lives. It matches the expense of using the asset with the revenues it generates. Depreciation is calculated using the straight-line or diminishing balance method. Under straight-line, an equal amount is expensed each year, while diminishing balance takes a higher percentage of the reducing net book value each year. Depreciation is a non-cash expense used to reflect the expired portion of the asset on the income statement in accordance with matching and prudence principles.

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    © All Rights Reserved
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    43 views25 pages

    Depreciation

    Uploaded by

    Arshad Chaudhary
    Depreciation is the allocation of the cost of non-current assets over their useful economic lives. It matches the expense of using the asset with the revenues it generates. Depreciation is calculated using the straight-line or diminishing balance method. Under straight-line, an equal amount is expensed each year, while diminishing balance takes a higher percentage of the reducing net book value each year. Depreciation is a non-cash expense used to reflect the expired portion of the asset on the income statement in accordance with matching and prudence principles.

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    Depreciation of non current

    assets
    Non current assets

    • Long life
    – At least more than one year
    • Not for resale purpose
    – Can be disposed off
    • To be used/expired/consumed in business
    • Don't change frequently
    Depreciation
    • Depreciation is expired part of non current
    assets
    • Depreciation is fall in value of non current
    assets due to:
    1. Consumption( physical deterioration , Wear &
    Tear)
    2. Time factor (Assets loose value due to
    passage of time )
    3. Technological changes ( inadequacy ,
    obsolescence)
    IAS 16
    On 1 November 2018, a business had following
    expenditures
    • Bought van for cash $60000 i.e capital expenditure
    • Paid for fuel $100 i.e. revenue expenditure
    Which of above expenditure would become
    expense of year 2018 as a whole?
    Fuel ( most probably used within 2018)
    what about van, should it be taken to income
    statement as expense?
    yes
    but how much ?
    only a relevant part i.e. expired in 2018
    OBJECTIVE
    • TO spread / Allocate cost of non current
    assets over economic life of non current
    assets so that each year’s income
    statement includes an expenses showing
    usage of non current assets in that year.
    • Depreciation is a process of allocation of
    cost , not valuation.
    • Depreciation is an application of matching
    and prudence concept
    Accounting treatment
    • Matching concept
    – Depreciation is expired part of non current assets
    i.e. An expense so it must be matched with
    revenue earned due to depreciation of non
    current(as per matching concept) to get fair profit/
    loss figure
    – Otherwise profit will be overstated
    • Prudence concept
    – Depreciation is expired part of non current assets
    i.e. No more an asset , so it must be deducted
    from cost of non current assets , so that assets
    appear at their fair valuation(as per prudence
    concept) in statement of financial position
    – Otherwise assets will be overstated
    Depreciation is non cash item.

    Depreciation is expired part of existing non


    current assets , it has nothing to do with
    purchase of future assets

    Depreciation and Repair & Maintenance are


    two separate expenses due to usage of non
    current assets.
    June 2017 P11 Q2
    Calculation of depreciation
    Note : no accurate calculation possible, so a best possible
    calculation is made , using best available information

    Estimated useful life / Estimated economic life


    Total Expected no. of years an asset is expected to be
    useful or expected time period for which business is
    planning to use an asset. An asset can be used for its
    whole useful life or less than that

    Scrap value/Residual value

    Expected sale value at the end of economic / useful


    life
    METHOD 1
    Equal instalments straight line original cost
    method method method

    an equal amount Depreciation rate


    is charged each is applied on cost
    year through out life of
    Dep asset.

    years
    Straight line method
    This method is time based calculation , ignoring usage , so
    amount of depreciation remains same irrespective of usage.
    This method is appropriate for assets providing even
    economic benefits over economic life e.g. building , furniture
    etc.
    Straight line / equal instalment method

    Cost - Scrap/ residual value


    estimated economic/useful life
    Total Depreciation
    Estimated life

    = Depreciation / year
    Or

    Depreciation = Cost * Depreciation rate


    June 2017 P11 Q3
    Question
    A business buys a delivery
    van for $12 000. Cost - Scrap value
    Its estimated useful life is four useful life
    years after which its scrap
    value is estimated to be $4000. 12000 - 4000
    4
    Depreciation is charged on the
    straight line basis.

    What is the annual amount of


    depreciation ?

    (A) $1 000
    ✔(B) $2 000
    (C) $3 000
    (D) $8 000
    Question
    A machine was purchased on 1
    January 2010 for $12 000.
    Cost - Scrap value
    useful life
    It has a working life of 8 years
    after which it will be sold for 12000 - 2000
    $2000. 8
    $1250/year
    Depreciation is calculated using
    the straight line method.
    cost 12000

    What was the net book value Depreciation -1st year (1250)
    at 31 December 2010?
    A $10 000 Net book value 10750
    B $10 500
    ✔C $10 750
    D $12 000
    Method 2
    Diminishing balance method/ reducing balance / written
    down value method

    Depreciation is charged as a % of value at the start of


    each year i.e. cost in 1st year & NBV in remaining
    years.

    Calculation of rate of depreciation using formula isn’t


    part of syllabus i.e. rate would be given
    Method 2

    Maximum Depreciation is charged In 1st year &


    Minimum in last year

    It is time based calculation, ignoring usage, which


    means a certain amount is charged as depreciation
    irrespective of usage

    This Method is appropriate for assets providing more


    benefits in earlier years and less in later years.
    Question
    A motor vehicle is
    cost 25000
    purchased for $25 000. It
    is to be depreciated on the Depreciation -1st year (5000)
    diminishing(reducing)
    Net book value after one year 20000
    balance method at the rate
    of 20 % per annum. depreciation -2nd year (4000)

    NBV after two years 16000


    What will be the book
    value of the motor Depreciation - 3rd year (3200)
    vehicle after three years?
    NBV after three years 12800
    A $10 000 B $12 200
    C $12 800 D $15 000
    Question
    A machine costing $60 000 is depreciated cost 60000
    by 25%per annum on the diminishing
    balance method. Depreciation -1st year (15000)

    What is the depreciation charge at the Net book value 45000


    end of the second year ? depreciation -2nd year (11250)

    (A) $11 250


    (B) $15 000
    (C) $26 250
    (D) $30 000
    June 2014 P11 Q4

    ✓
    May 03 P1 Q11

    ✓
    June 2004 P1 Q6

    ✓
    June 2008 P1 Q5

    ✓
    June 2008 P1 Q6

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