Assignment 2: Submission—Course Project
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M5_A1.docxDepreciation is considered as an expense to the business. It is the change of the dollar value of an asset over a predetermined number of years of use by the business. Though there exists many methods for determining the value of the depreciation, the most renown is the straight line and the reducing balance method.
How to calculate the value of an asset using straight-line method
Year of depreciation =cost price- residue value/no. of years used
Or Year of depreciation= cost price / no. of years used
In this method, regardless of the formulae used the value of the asset remain the same
Example 1: the cost of furniture is $120,000, and useful life is 6years. The value of the asset after five years will be 120, 00/6= $ 20,000 so the depreciation per year was $20,000
How to calculate the value of an asset, using Reducing balance method
Value of the asset = Initial cost price*industrial%
Each year after depreciation the value is calculated as follows;
Value of the asset = net book value (NBV)*industry %, therefore, each year assumes a different value of depreciation
Example 2: Cost value of furniture is $120,000, Asset useful life is 5yrs
Value of the asset in this method the rate of depreciation is determined by dividing 1 to the number of useful life so the rate will be 1/6*100= 16.7%
For the first year, the depreciation value of the asset will be $120,000*16.7%=20,040
For the 2nd year the value depreciation will be $(120,000-20040)*16.7% =16,693
The process continues until the fifth year, and it is observed that the depreciation value keeps on changing each year as centrally to the straight line where the value of the asset remains constant.
Depreciation affects the following accounts
1. Fixed asset account- depreciation causes a decrease in the company's fixed assets. Depreciation expense is debited, and the contra account, i.e., accumulated depreciation account is credited.
2. Profit and loss account - a depreciation expense has a direct effect on the profitability of the company, the higher, the larger the provision for bad debts the lower the company income.
3. Balance sheet- Depreciation expense affects has a negative on the balance sheet assets.
References
Donaldson, K., & Colorado. (2011). Depreciation of capital assets. Denver, CO: Colorado Legislative Council.
Leake, P. D. (1976). Depreciation and wasting assets. New York: Arno.
Patry, A., & Statistics Canada. (2007). Economic depreciation and retirement of Canadian assets: A comprehensive empirical study. Ottawa: Statistics Canada, Investment and Capital Stock Division.
