Accounting for Depreciation Theory

* Common theory Q&A 
What is depreciation ?

*the fall in value of the fixed Assets(Vehicle , Machines) .

*It is the allocation of the cost of an asset over its useful life.

Why does a business need to open a depreciation account?

*Because the whole cost of the fixed assets should be spread out over its useful life and it is not just treated as an expense in the year of purchase.- by GOING CONCERN CONCEPT (business operation is assumed to be indefinitely)

Causes of depreciation?

*1)Physical Deterioration (Wear & Tear) -Due to the exposed of asset to the elements of nature. eg Furniture & Fittings

*2) Obsolescence- Outdated eg, Computers

*3) Depletion of assets as time passes - disappear eg , mining land

*4) Passage of time - Shorten life of assets eg , rent on land , patent rights

Calculation of Depreciation


Straight-line method
formula:

Original cost$ - Estimated Scrap Value$ / No. of useful Life(Years)

OR

Rate of  Depreciation% / year X Original cost$

Adv(+) VS Disadv(-)

+Easy to calculate and understand

-In real life, its not accurate amount of wear and tear may vary every year.

Reducing balance method
formula:

Rate of Depreciation% / year X Net Book Value$ (Remaining value aft every accounting year)

Adv(+) VS Disadv(-)

+Most Efficient in giving asset a more truthful allocation of depreciation

- takes a long time to write off the books

-Rate of depreciation is high as compared to straight-line method

Revaluation method( not in O lvl, A lvl syllabus ) 
formula:

Value of purchase $ + Any New Purchases $ - Value of asset at the end $

Adv(+)Vs Disadv(-)

+More realistic financial position to be expressed

- In practical takes up a lot of time and effort ,thus increase cost of labour.