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When you talk about depreciation in relation to accountancy it means
"calculating the decreased value" of some of the Fixed Assets.
The reason why the value of some of the Fixed Assets like tools and machinery
decreases is that they get worn out by being used.
Example
When the production company "Kafue Company" in year 2005 bought
their first Big Machine, the price was 20.000 $. It was used until the end of
2010 when a new one was bought.
When the old Big Machine was sold, they only got 1.000 for it because it was
worn out. This means that the Big Machine had gradually lost 19.000 in value
during the five years it was making items for the company.
Effect on the Financial Statement
To get a true picture of the value of Fixed Assets in a company it would
therefore be necessary to calculate the depreciation every year and reflect it
in the Financial Statement.
The depreciation will affect the value of Fixed Assets which is indicated in
the Balance Statement.
It will also affect the Profit and Loss Statement where the depreciation will
be deducted as an expense.
What to depreciate
If you decide that you have to decrease the value of some of the Fixed
Assets in your company, it must be larger things which represent a considerable
value and which lose value by being used and/or getting old. Smaller things like
hand tools are not depreciated.
The depreciation must be calculated for each machine individually.
How to depreciate
First you have to decide for how long time you can expect the machine to
work for the company before it will break down totally or you will want to
replace it.
Secondly you must decide which price you can expect to get for it when you
sell it.
Example
You estimate that your new Big Machine that have cost you 60.000 will
probably work for five years and that you can eventually sell it at 5.000.
The easiest way to calculate the depreciation is to say that the machine
loses the same value each year.
If you decide to use this way of calculating depreciation, the depreciation
of the Big Machine which was bought at 60.000, will look like this:
The total amount which the Big Machine will lose in value is:
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New price in 2006: |
60.000 |
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- expected sales price in 2010 |
5.000 |
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= loss of value during 5 years: |
55.000 |
Depreciation each year for 5 years: 55.000/5 years = 11.000
Effect on the Financial Statement
Each year you should deduct 11.000 from the Profit and Loss statement.
The value of the machine has to be registered on the Balance Statement in the
coming years when you depreciate by 11.000 each year is:
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2006: |
60.000 |
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2007: |
49.000 |
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2008: |
38.000 |
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2009: |
27.000 |
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2010: |
16.000 |
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2011 |
5.000 |
There are other ways to depreciate. For instance by 30 % each year.
Contact your accountant to find the best way for your deprecations.
- Go to next
business issue: Reduce Stock
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| dattatraya appaso sonawane, india |
25-11-2010 |
SIX YEARS
| Lazarus Ogbonnaya Okpara, Nigeria |
01-10-2010 |
Depreciation impacted positively on my company with the adoption of the straight line method. In overall, there´s growth in the capital base of my company with the principle of consistency. Thank you.
| vasanth, india |
20-09-2010 |
it is esay way to know about depreciation and how can we calculate the value. but one think is the next time i expect from you, if all the method of depreciation will expliened,we can learn more.
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