Depreciation applies on non-current assets

Depreciation is presented on the statement of financial position

Before we can work depreciation we need to be told two pieces of information. The method and how much depreciation is applied.

There are two methods of working depreciation

  • Straight line method
  • Reducing balance method

What is the straight line method?

The straight line method is depreciation of on the cost of the asset. For example:

10% depreciation on a cost of a car costing £20,000 using the straight line method?

Year 1

10% * 20000 = 2000

  • Cost = £20,000
  • Accumulated depreciation = £2,000
  • Net book Value = £18,000

Year 2

10% * 20000 = 2000

  • Cost = £20,000
  • Accumulated depreciation = £4,000 (£2,000 + £2,000)
  • Net Book Value = £16,000

What is the reducing balance method?

The reducing balance method depreciates on the net book value. For example:

10% depreciation on a cost of a car costing £20,000 using the reducing balance method?

Year 1

10% * 20000 = 2000

  • Cost = £20,000
  • Accumulated depreciation = £2,000
  • Net book Value = £18,000

Year 2

10% * 18000 = 1800

  • Cost = £20,000
  • Accumulated depreciation: £3,800 (£2,000 + £1,800)
  • Net Book Value = £16,200
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