Depreciation

Re:Depreciation

Hi Birdie.

Items like cars will lose most of their value in the first year or two, hence we depreciate these by reducing balance to reflect this.

Items like buildings will have a longer useful economic life, so straight line is used to show a steady fall.

This is a general overview - companies can set their own depreciation policies to suit themselves.

Scott.

Re:Depreciation

Thank you very much

Re:Depreciation

Reducing balance is used on items that depreciate a lot within the first few years, but nearly always have some residual value at the end f their life.

eg
A new car depreciates by over 30% when you drive it out of the dealership doors, but when its over 30 years old and spewing out black smoke, there usually some idiot who'll but it for £100 or a garage that will take it for £50 part exchange, hence the reducing balance method is used.

eg
A computer usually has a 4 year life span before the technology is useless and outdated for business use. So, the straight line balance would be used to write off the value of the computer at the end of the four years, as they generally cannot be sold on or part exchanged as they hold no value at the end of the term.

Does this help, or have i confused you more? :roll:

Re:Depreciation

Thank you, it all makes sense now