Depreciation Accounting
Depreciation is a method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes. It is a decrease in an asset’s value caused by unfavorable market conditions. a decrease in an asset’s value, may be caused by a number of other factors as well such as unfavorable market conditions, etc. Machinery, equipment, currency are some examples of assets that are likely to depreciate over a specific period of time.
Depreciation – Different Methods
- Straight line method;(cost-residual value)/ estimated useful life
- Written Down Value method or declining balance method : %age is fixed
- Accelerated Depreciation
- Sum of years’ digits method; Example, if an asset is to be depreciated over five years, add digits 5,4,3,2,1 .The total is 15.For the 1st year depreciation is 5/15,for 2nd year,4/15 , and so on
Need for depreciation
- To know correct profit
- Show correct financial position
- Make provision for replacement of assets
Factors of depreciation
- Cost of asset
- Residual value
- Life of an asset