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Understanding Depreciation Methods and Fixed Assets

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16 diapositives · 276 Views · Aug 04, 2014

Learn to define and calculate depreciation using straight-line and reducing balance methods, prepare asset schedules, and analyze profit/loss upon asset disposal. Understand fixed assets and depreciation in financial statements.

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Understanding Depreciation Methods and Fixed Assets
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  1. Learning Outcomes • Explain the term depreciation • Calculate depreciation using the straight line method • Calculate depreciation using the reducing balance method • Prepare a fixed asset schedule • Discuss how a profit or a loss may occur when an asset is disposed • Establish if a profit or a loss occurs when an asset is disposed of

  2. What are Fixed Assets? Those assets of significant value which: • are for use in an organisation • are of long life • are not bought with the intention of resale for profit

  3. What is depreciation? • Fixed assets do not last forever • Depreciation is the wear and tear or loss in value of an asset • depreciation is the difference between the original cost and the amount received when sold

  4. Depreciation Calculation

  5. Why do assets depreciate?

  6. Depreciation in the Financial Statements • Annual depreciation shown as an expense in the Income Statement • Fixed assets should be shown at the Net Book Value in the Balance Sheet

  7. The Fixed Asset Schedule

  8. Calculating Depreciation • Actual depreciation cannot be established until the asset is disposed of. • Depreciation must be estimated: • The Straight Line Method • The Reducing Balance Method

  9. Straight Line Depreciation • Calculated on original cost spent • Depreciation amount is the same amount each year The owner has opted for a policy of depreciating equipment at 20% per annum using the straight line method. The company provides for depreciation using the straight line method (at 25% p.a.) on the value of fixed assets held at the end of its financial year.

  10. Example - Straight Line Method Simon Murphy purchased a machine for €10,000 in 2008. He has decided depreciate machinery by 20% per annum straight line. What is the annual depreciation for 2008? Original cost x 20% = €2,000 annual depreciation in 2008

  11. Example - Straight Line Method Simon Murphy purchased a machine for €10,000 in 2008. He has decided depreciate machinery by 20% per annum straight line. What is the net book value at the end of 2008? Original cost of €10,000 less depreciation €2,000 = €8,000

  12. Example - Straight Line Method Simon Murphy purchased a machine for €10,000 in 2008. He has decided depreciate machinery by 20% per annum straight line. The Asset Schedule for 2008

  13. Example - Straight Line Method Simon Murphy purchased a machine for €10,000 in 2008. He has decided depreciate machinery by 20% per annum straight line. The Asset Schedule for 2009

  14. Straight Line

  15. Example - Straight Line Method Simon Murphy purchased a machine for €10,000 in 2008. He has decided depreciate machinery by 20% per annum straight line. The Asset Schedule

  16. Asset Schedule