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Understanding Depreciation in Business Studies

This document provides an overview of depreciation in the context of business studies, detailing how it affects fixed assets. Depreciation occurs when an asset decreases in value due to age, usage, or obsolescence. It is essential for firms to recognize this loss of value annually. The document explains the calculation of depreciation with an example involving a €40,000 piece of equipment depreciated over ten years at a rate of 10%. It also outlines the impact on the trading profit and loss account, and how it adjusts the asset's value on the balance sheet.

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Understanding Depreciation in Business Studies

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  1. 2nd Year Business Studies 23rd January 2013

  2. Depreciation

  3. Depreciation

  4. Depreciation

  5. Depreciation €225,000

  6. Depreciation • Depreciation is when a fixed asset goes down in value for one of the following reasons: • Because it has got older • Because it has been used a lot • Because it has gone out of date

  7. Depreciation • So what will a firm do to recognise that its fixed assets are decreasing in value? • They reduce the fixed asset value by a certain amount each year. This amount is called Depreciation • Depreciation is usually a percentage of the cost of the fixed asset

  8. Depreciation • E.g. Equipment cost €40,000. It is to be depreciated over 10 years at the rate of 10% of cost. • Step 1: €40,000 X 10% = €4,000 • This is the depreciation expense for the trading, profit & loss account • Step 2: Reduce the value of the fixed asset in the balance sheet by €4,000 • €40,000 - €4,000 = €36,000 • €36,000 is the Net Book Value (NBV)

  9. Balance Sheet

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