Depreciation

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:31AM in AAT student discussion
Hi,
I am confused about the reducing balance method. I always thought that the percentage was taken off the cost of the item, not taking into account the life of the item, unlike the straight method where the scrap value of the item is taken into account when deciding on the amount to be depreciated. I have found examples where the scrap value has been taken into account and then the percentage deducted and where the scrap value has been ignored. Can anyone help?

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Depreciation

    Hi Lorri,

    the RB balance works like this:

    Cost of Asset = 20,000
    Accumulated depreciation = 15,000

    Depreciation charge is worked out by:

    (20,000-15,000) = 5,000 * the company's depreciation policy.

    You're assumption in your posts works on the straight line method.

    Hope that helps
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Depreciation

    Hi Peugeot
    Thanks for your reply.
    Lorri
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Depreciation

    Hi. maybe im being thick cos ive had a few glasses of wine but I don't see the original question has been answered.

    Just to clarify: when working out depreciation using reducing balance the residual value is deducted first. (in my experience)
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Depreciation

    Yes that is correct but my answer is also correct in that depreciation is charged on the cost less accumulated depreciation multiplied by the depreciation policy of the company. I did not take into account any residual value because I was simply trying to explain the difference between straight line/reducing balance (albeit after a few cans myself! :lol: )

    Under normal circumstances yes, residual value would be taken into account though in practice this can sometimes be very misstated.

    Regards
    Ste
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Depreciation

    Actually i've just looked it up, the residual value isn't deducted when calculating reducing balance depreciation!

    Shouldn't drink before posting, but i need it to get me to sleep on a Sunday!

    So for the record on straight line the residual value is deducted before calculating the depreciation, and on reducing balance it isn't.

    Or at least thats what the books say, I don't work in practice.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Depreciation

    Hi
    Thanks I thought the residual value was not deducted when calculating reducing balance depreciation, but I have found exercises where it has been.I did ask about it but was told it was because there is a difference in cost accounting and financial accounting?

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