What is Depreciation?
What is depreciation? Now I’m sure what it is, let’s say you heard that word before talking about what it is and a few other terms are now involved. Now let’s say you buy a car with the money. If you consider this to be an expense when you buy that car, I fear that you are wrong in accounting when you buy land to build a car or other type of equipment. Any fixed asset is what we call capitalization and you do not spend it, so when you capitalize on that car it will be carried on your balance sheet. As shown here, when you buy that car, it goes on your balance sheet. I’m told you that over time you will keep it as an asset on your balance sheet and when you start using this car you will start using that car when you spend it slowly and when you start using it over time.
The car costs slowly and we call it depreciation cost y You use it slowly and the time you spend on that car and the depreciation cost now goes on your income statement. If you are not sure what the income statement on the asset balance sheet is, I have created a complete course series where you can analyze the financial statements. Check it out and see if it’s right for you. Now we’re talking about what we call book value. Now the cost of the assets you own is the cost of your car and what is the book value? Call Cumulative Depreciation Cumulative depreciation is the sum of your depreciation expenses that you add up to all your expenses over the years. Once you reduce it, we call it cumulative depreciation. After deducting the depreciation you have accumulated, the book value remains the book value. So in this short series, we are going to talk about three depreciation methods.
Major Methods of Calculating Depreciation Depreciation is now an accounting term for a business accounting cost, but the cost itself represents only the assessment of the declining value of fixed assets over time. So let’s find out what depreciation means since depreciation is not related to cash flow but it is an estimate of the value that is declining. Then briefly introduce the two main methods of calculation by accountants. A simple example of this is when a company CEO buys a company car for his or her use for 40,000 and spends it on business for the next three years, and three years later the car is worth 25,000 in the market. It should be fairly clear that the value of the fixed assets owned by the company they bought it from has fallen. The initial cost was 40,000 three years later. Since it is only worth 25,000, it has a depreciating value of 15,000 over three years, and if it is reflected as a cost each year, the cost is about five spread over the following three years. Depreciation of assets is 1,000 a year and that is what we go through as the depreciation cost of the income statement. So how do you go about calculating depreciation? They are the two main methods and let’s look briefly at both of them. It is called the straight-line method. It is very easy to calculate the most popular one and the other is called the minus balance method.
The straight line is calculated by taking into account the initial cost of the assets and making an allowance for it. Since the asset has residual value, you may be able to sell it at the end of its useful life, and when you divide the asset, divide that number by the estimated useful life. The initial cost you make is a percentage that you calculate the depreciation value using the depreciation rate. It seems a bit complicated by applying a ratio equal to the value of the scriptures deducted after each year. It is easy to explain as we will show you a simple example of both of these methods shown on the screen. Using the same example as an investment to correct assets to show the two ways a business buys a new packaging machine seems like a good machine that costs 50,000 50,000 and they expect it to take five years. It’s worth ten thousand pounds. Maybe a used machine to sell to another buyer.
Fifty thousand pounds as The initial cost is that it will last for five years, so the deductible balance may apply a depreciation rate of 20 percent to a slightly different calculation, but we should note that in five years it will be worth ten thousand pounds. Keep in mind that the line depreciation method has a low-cost residual value at first glance. Then divide by the annual depreciation charge based on your estimated useful life span over several years. Then its cost for the packaging machine is less than 50,000 residual value I am going to divide it by five years of useful life and it is very simple if you work the numbers. It is 40,000 and it is less than 50 divided by ten in five years. So we depreciate that asset by 8,000 a year. That asset should be the cost of depreciation in the income statement for each year and will fall when the machine is used throughout the year.
The n depreciation balance method is not very similar, but a slightly different approach, so when a slightly different depreciation number reduces the equilibrium we say that the depreciation rate will be 20%, so let’s see what we start with for 50 and In the first year we applied a 20% depreciation to 10,000. So the cost of depreciation in one year would be ten thousand pounds. It’s starting to come down more than two thousand pounds on a straight line, so we’ve only got 40 book value and less than 50 out of ten accumulated, so we are investing 40 thousand pounds net book value Only twenty percent. Next year we will invest 8,000 in our twenty percent depreciation charge for less than 32,000 and the depreciation charge will fall, leaving the charge on a depreciation ch reduction balance basis higher than the straight-line basis in the first year but over the years Both approaches are perfectly valid because it is less than a simple linear basis Do not forget the important thing about depreciation.