Summary of Depreciation | How to Calculate Straight Line & Reducing Balance Depreciation

Main Ideas and Concepts

Definition of Depreciation:
- Depreciation refers to the reduction in the value of an asset over time.
- It is crucial for businesses to account for Depreciation as it impacts their financial statements and overall expenses.
Importance of Recording Depreciation:
- Accurately recording Depreciation provides a clearer picture of a business's financial health.
- For example, if a business has a fleet of vans that depreciate, this can represent a significant cost.

Depreciation Calculation Methods

1. Straight-Line Method

Formula:
Depreciation Expense = (Historic Value - Residual Value) / Expected Life

Example:

Historic Value: £30,000 (purchase price of a van)
Residual Value: £10,000 (expected sale price at the end of its life)
Expected Life: 4 years
Calculation:
- Depreciation Expense = (30,000 - 10,000) / 4 = £5,000 per year.
- This means the business records a Depreciation expense of £5,000 annually for four years.

2. Reducing Balance Method

Concept: This method calculates Depreciation by applying a fixed percentage to the asset's remaining book value each year.

Formula:
Depreciation Expense = Historic Value × Depreciation Rate

Example:

Historic Value: £30,000
Depreciation Rate: 20% (0.20)
Yearly Calculation:
- Year 1:
  - Depreciation = 30,000 × 0.20 = £6,000
  - End-of-Year Value = 30,000 - 6,000 = £24,000
- Year 2:
  - Depreciation = 24,000 × 0.20 = £4,800
  - End-of-Year Value = 24,000 - 4,800 = £19,200
- This process continues until the asset is disposed of or no longer in use.
The Residual Value after four years using this method is £12,288.

Instructions for Further Practice

The video encourages viewers to download a Task Sheet provided in the description to practice calculations for both straight-line and reducing balance Depreciation.

Speakers or Sources Featured

The video appears to be presented by a single speaker, although no specific name is mentioned in the subtitles. The content is instructional and aimed at educating viewers on Depreciation methods.

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