DEPRECIATION

Re:DEPRECIATION

Hiya!

If you make a large payment for an item, say for instance a car that costs £12,000, but you expect it to last for 5 years, you shouldn't 'book' all of that cost against your profit in one year, as you expect it to be used to make a profit for 5 years. Depreciation is a way of splitting that cost or booking the expense of the car over the 5 years you expect to use it. If you expect to use the car equally over the 5 years and it will be worth nothing at the end, you'd carry out straight line depreciation, which basically means you split the cost of the car over 5 years (£12,000 divided by 5 is £2,400). You hold the full value of £12,000 as a debit in your balance sheet in a vehicles at cost account, then when you carry out your year end / period end adjustments, you credit your vehicles depreciation account in the balance sheet and debit your depreciation expense in your profit and loss account for £2,400. In the balance sheet you would hold the vehicle at cost of £12,000 less vehicle depreciation of £2,400, which gives you a net book value of £9,600. You'd carry this out until the vehicle was fully depreciated (No net book value left in the balance sheet) or you disposed of it.

Oooh I've gone on a bit, I always do.

Hope this helps.

Deb

Re:DEPRECIATION

Reducing balance method is used when you expect to use a fixed asset more in earlier years than in later years. I can't think of an example off the top of my head, but basically as you are using it more in the first years you are charging more of the cost to the P&L which will reduce over the years.

If you had an item for £10,000 and were depreciating using a reducing balance method of 25%, you would charge (10,000 * 25%) 2,500 in the first year, so your Net book value is now 1000 - 2500 = 7,500.

The following year you would charge 7,500 * 25% = 1,875, leaving you with a NBV of 5625 and so on and so on.

Deb