Theory question 104
Depreciation(a) What is depreciation of an asset?
(b) List three causes of depreciation.
(c) Explain the following methods of depreciation: (i) straight line; (ii) reducing balance; (iii) revaluation.
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(a) Depreciation is the fall in value of a fixed asset over its useful life, i.e. the part of its cost used up in a period, charged against profit.
(b) Any three: wear and tear through use; passage of time; obsolescence (out of date); depletion (e.g. mines); inadequacy; accidents, rust or decay.
(c)(i) Straight line: the same amount each year = (cost - residual value) ÷ useful life.
(ii) Reducing balance: a fixed percentage of the net book value each year, so the charge falls year by year.
(iii) Revaluation: the asset is valued at the start and end of the period; the fall in value is the depreciation (used for small items such as loose tools).
Give the formula for straight line.