Chapter 35, Depreciation Flashcards Preview

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Flashcards in Chapter 35, Depreciation Deck (7):
1

Depreciation

the concept of a fixed asset losing value over time

2

Depreciation terminology

- Net Book value (cost minus the amounts are taken off)
- Life of an asset
- Accumulated Depreciation (addition each year)
- Residual Value (value at the end of its useful life)
- Historic Cost (initial cost)

3

Methods of measuring Depreciation

- Straight line method: equal amount is taken off the value of an asset annually
(initial cost - residual value / life of asset)
- Reducing (Declining) balance: Reduces at a constant percentage

4

Advantages of Straight line

- amount of depreciation is lower in the first few years
- shows the business is of higher value
- profit will be higher in early stages of the business

5

Disadvantages of Straight line

- an estimate of the residual value is required
- It assumes that lif of asset is known
- the value of the business may appear inflated

6

Advantages of declining balance

- more realistic
- no estimate of residual value

7

Disadvantages of declining balance

- makes it harder to borrow due to the lower value of assets