Depreciation methods, accumulated depreciation and expenses
Depreciation applying one of selected depreciation methods is used as cost of acquired non-current tangible assets is not included into the income statement at the moment of acquisition. The reason for this is that these assets are being used in the business for quite long-period of time (more than a year), therefore their cost must included into expenses in the income statement gradually during useful life of the asset in the form of depreciation applying one of depreciation methods.
Such gradual distribution of non-current tangible asset distribution cost is called depreciation, i.e. the asset depreciated during its useful life and depreciation cost is included into the income statement.
Useful life is either:
Accounting entries for depreciation expenses:
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Deprecation expenses (Income Statement)
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| D 1000 |
C |
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Accumulated depreciation(Balance sheet)
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| D |
C 1000 |
In the Balance Sheet non-current fixed assets are reflected at acquisition cost less accumulated depreciation. Such difference is called Net Book Value.
Usually non-current tangible assets are depreciated till Estimated Residual Value, i.e. price for which the asset can be sold at the end if its useful life.
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Deprecation methods
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Formulas
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Straight-line – the same amount of depreciation expenses each year is included into the income statement |
Annual depreciation amount=(Acquisition cost-Residual value)/Useful life in years |
Production – deprecation expenses amount depend on the quantity of products produced or in other way obtained using the asset |
Annual depreciation amount=(Acquisition cost-Residual value)/Maximum quantity of products the asset can produce |
Accelerated (or reducing balance) – the asset is quicker depreciated in the beginning of its useful life. Depreciation is calculated as a certain percentage applied on the net book value at the end of each year. |
Annual depreciation percentage (%)=2*(100/useful life in years)
Annual depreciation amount=Net book value*Annual depreciation percentage |
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