Accounting-Depreciation Of Assets

Depreciation refers to the reduction in amount of assets. In other words, depreciation represents the amount of wear and tear resulting due to usage of assets by the passage of time. For calculating depreciation, three methods are commonly used. These are straight line method, reducing balance method and units of production method. The Depreciation under straight line method is calculated as below:

Depreciation = (Cost – Salvage Value)/Useful life

Hence, for determining the depreciation for the first year, the management needs to work upon few information’s. These required details or information’s are as below: (ProfitBooks.net, 2018)

• Useful life – This is the number of years up to which the assets will provide productive results or can generate revenues. Means the number of years up to which the asset can be successfully used without incurring heavy expenditure over it.

• Salvage value or residual value – This is the amount that the company will get upon selling of the assets at the end of its life. This amount is also known as scrap value. (Courses.lumenlearning.com, 2018)

• Cost of the assets – The historical cost or the amount paid for purchase and installation of the asset. The cost includes all the cost incurred to put the asset to use. These costs include the purchase price, installation costs, shipping costs, taxes and octroy, etc.

• Method of accounting – According to AASB, after initial recognition of assets, the company needs to select the method for measuring the assets after initial recognition. There are two methods which can be adopted by business. One is cost model and other is revaluation model.

References:

ProfitBooks.net. (2018). What Is Depreciation - Types, Formula & Calculation Methods For Small Businesses Accounting. [online] Available at: https://www.profitbooks.net/what-is-depreciation/ [Accessed 28 May 2018].

Courses.lumenlearning.com. (2018). Depreciation of Assets | Boundless Accounting. [online] Available at: https://courses.lumenlearning.com/boundless-accounting/chapter/depreciation-of-assets/ [Accessed 28 May 2018].