lesson 3 Depreciation

Lesson 3 Depreciation

 

Depreciation is really easy when you are comfortable with it, but when it’s new to you like a lot of these adjustments are at first, it can seem over whelming.

Try not to think of it as an accounting transaction and think of it as how much your asset is worth. We know when we buy a car that every year it is worth much less than it was when we purchased it. Well this is what the depreciation is.

It’s an accounting term for reducing the balance of an asset.

The most common ways of calculating depreciation are reducing balance and straight line.

 

Straight Line

With straight line depreciation the invoice is reduced by a set amount every year.

For example £1000 invoice at 20% Depreciation over 5 years with a ZERO residual value.

(e.g)

01/01/15 Car   £1000   20% Dep £200   /12 = £16.67 per Month.

Value of car 01/01/15    £1000

Jan-Dec 15                  (£200)

Jan-Dec 16                    (£200)

Jan –Dec 17                   (£200)

Year ended balance       £400

If a question asked what the balance of the asset was at year ending Dec 17 it would be £400 because there has been 3 years depreciation at £200 per year =£600.

 

Reducing  balance

Using the same example as above I will show you the depreciation using reducing balance.

A reducing balance depreciation is similar except every year the number changes as the depreciation is deducted before the next years depreciation is calculated.

(e.g)

01/01/15 Car   £1000   20% Dep reducing balance method.

Value of car 01/01/15    £1000                   (1000-200=800)

Jan-Dec 15                  (£200) 

Value of car 01/01/16   £800                      (800-160=640)

Jan-Dec 16                    (£160)

Value of car 01/01/17   £640                      (640-128=512)

Jan –Dec 17                   (£128)

Year ended balance       £512

 

If a question asked what the balance of the asset was at year ending Dec 17 it would be £512 because there has been 3 years depreciation at reducing the balance each year (200-160-128)  = £512

 

I hope this helps with any depreciation issues, Please let me know if there are any other in a nutshell lessons required

Nicola