Starter

Learning Objectives To understand the term depreciation To calculate straight-line depreciation To calculate reducing balance depreciation

Recap: What does a balance sheet show? Assets Liabilities Working Capital Net Assets Capital Employed Current Ratio

Depreciation What is depreciation? A reduction in the value of an asset over time, due in particular to wear and tear

Straight-Line Depreciation This is where the same amount of depreciation is charged every year. (Original Cost of the Fixed Asset – Estimated Salvage Value) / Estimated Useful Life of Asset

Straight-Line Depreciation A business buys a computer network for £5000. It estimates the computer system will be worth around £200 scrap value. The business has always replaced its computer network every three years to keep it up to date. How much is depreciation per year?

Reducing balance depreciation The same percentage of an asset’s value is taken off every year (e.g. 20%) If an asset’s value is £10,000 and the reducing balance percentage is 10%, then the depreciation at the end of year 1 is £1000. This brings the assets value down to £9000, so the depreciation at the end of year 2 is:

Depreciation On the balance sheet, it appears through the reduction of the value of fixed assets. This means that the balance sheet reflects a true and fair value of the assets.