Depreciation
Is the drop in value of an asset that a business own over a given time period.
Businesses need to be aware of deprecation so they have an accurate valuation of their
assets recorded in their accounts.
They type of assets that may depreciate in value are vehicles, machinery and equipment
which become worth less the more you use them.
Some assets a business has can go up in value e.g. property and land. This is called
appreciation.
Depreciation records the drop in value of an asset and this makes your company worth less
money and this makes your company worth less.
To ensure that the accounts are accurate depreciation is recorded as an expense in the
accounts.
An expense is an item that costs the company money and reduces profit. When profit is
reduced the company’s value goes down and the accounts should be accurate.
How do we calculate Depreciation?
Need three things:
1. Purchase Value/ Historic Costs/ Cost of Assets-> How much it costs to buy the
asset.
2. Re-sale value/residual value -> The value you expect to get for the asset after
you finish using it.
3. Useful working life/number of years of use -> How many years you expect to
keep it and use the product for.
Straight Line Depreciation:
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑨𝒔𝒔𝒆𝒕 − 𝑹𝒆𝒔𝒊𝒅𝒖𝒂𝒍 𝑽𝒂𝒍𝒖𝒆
= 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓.
𝑵𝒐. 𝒐𝒇 𝒚𝒆𝒂𝒓𝒔 𝒐𝒇 𝒖𝒔𝒆
e.g. A car costs £20,000 new and is only able to be kept by the value cab driver for 4 years. The
estimated resale value is £8,000.
𝟐𝟎, 𝟎𝟎𝟎 − 𝟖𝟎𝟎𝟎 𝟏𝟐, 𝟎𝟎𝟎
= = £𝟑𝟎𝟎𝟎 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓.
𝟒 𝟒
e.g. A printing company purchases a printing press for £280,000 and it lasts for 20 years. The crap
value is £10,000.
𝟐𝟖𝟎, 𝟎𝟎𝟎 − 𝟏𝟎, 𝟎𝟎𝟎 𝟐𝟕𝟎, 𝟎𝟎𝟎
= = £𝟏𝟑, 𝟓𝟎𝟎 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓.
𝟐𝟎 𝟐𝟎
Advantages of Straight Line Depreciation Disadvantages of Straight Line Depreciation
It is commonly used in the UK + NI and is seen as more Based on estimates in terms of resale value and working life -> may
acceptable by banks, accountants, lenders and the inland not be accurate. Only as accurate as the research that goes with it.
revenue.
It's simple and easy to calculate and does not require the May not be accurate as some assets such as cars, machinery and
specialist skills of an accountant. equipment depreciate a lot in the first years of use and then less as
they get older. But when we use straight line method which tells us
an average for each year which is not accurate and the values
recorded in the accounts can be incorrect.
Makes the business plan in the long term as the business is If we overestimate the working life or resale value then the business
being to forced to calculate how long an asset may be of will not be as profitable as predicted.
use to them and when they will need to replace them.
Is the drop in value of an asset that a business own over a given time period.
Businesses need to be aware of deprecation so they have an accurate valuation of their
assets recorded in their accounts.
They type of assets that may depreciate in value are vehicles, machinery and equipment
which become worth less the more you use them.
Some assets a business has can go up in value e.g. property and land. This is called
appreciation.
Depreciation records the drop in value of an asset and this makes your company worth less
money and this makes your company worth less.
To ensure that the accounts are accurate depreciation is recorded as an expense in the
accounts.
An expense is an item that costs the company money and reduces profit. When profit is
reduced the company’s value goes down and the accounts should be accurate.
How do we calculate Depreciation?
Need three things:
1. Purchase Value/ Historic Costs/ Cost of Assets-> How much it costs to buy the
asset.
2. Re-sale value/residual value -> The value you expect to get for the asset after
you finish using it.
3. Useful working life/number of years of use -> How many years you expect to
keep it and use the product for.
Straight Line Depreciation:
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑨𝒔𝒔𝒆𝒕 − 𝑹𝒆𝒔𝒊𝒅𝒖𝒂𝒍 𝑽𝒂𝒍𝒖𝒆
= 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓.
𝑵𝒐. 𝒐𝒇 𝒚𝒆𝒂𝒓𝒔 𝒐𝒇 𝒖𝒔𝒆
e.g. A car costs £20,000 new and is only able to be kept by the value cab driver for 4 years. The
estimated resale value is £8,000.
𝟐𝟎, 𝟎𝟎𝟎 − 𝟖𝟎𝟎𝟎 𝟏𝟐, 𝟎𝟎𝟎
= = £𝟑𝟎𝟎𝟎 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓.
𝟒 𝟒
e.g. A printing company purchases a printing press for £280,000 and it lasts for 20 years. The crap
value is £10,000.
𝟐𝟖𝟎, 𝟎𝟎𝟎 − 𝟏𝟎, 𝟎𝟎𝟎 𝟐𝟕𝟎, 𝟎𝟎𝟎
= = £𝟏𝟑, 𝟓𝟎𝟎 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓.
𝟐𝟎 𝟐𝟎
Advantages of Straight Line Depreciation Disadvantages of Straight Line Depreciation
It is commonly used in the UK + NI and is seen as more Based on estimates in terms of resale value and working life -> may
acceptable by banks, accountants, lenders and the inland not be accurate. Only as accurate as the research that goes with it.
revenue.
It's simple and easy to calculate and does not require the May not be accurate as some assets such as cars, machinery and
specialist skills of an accountant. equipment depreciate a lot in the first years of use and then less as
they get older. But when we use straight line method which tells us
an average for each year which is not accurate and the values
recorded in the accounts can be incorrect.
Makes the business plan in the long term as the business is If we overestimate the working life or resale value then the business
being to forced to calculate how long an asset may be of will not be as profitable as predicted.
use to them and when they will need to replace them.
