# Depreciation Flashcards

1
Q

Define depreciation

A

Estimate of the loss of value of a non-current asset over its expected useful life
The purchase of a non-current asset is a capital expenditure

2
Q

What are the 2 accounting principles used in depreciation?

A

Matching - Cost of the asset is spread over the years which benefit from the use
Prudence - Profit and assets will not be overstated

3
Q

What are the 4 causes of depreciation?

A

Physical deterioration
Economic reasons
Passage of time
Depletion

4
Q

What are the 3 types of methods of depreciation?

A

Straight line method
Reducing balance method
Revaluation method

5
Q

What are the 3 formulas for the straight line method?

A
1. Cost of asset / number of years in use
2. Cost price - residual value / number of years in use
3. Cost price x %depreciation
6
Q

Define residual value

A

The value of the non-current asset at the end of its useful life

7
Q

What is the formula for the reducing balance method?

A

Book value i.e. Cost price - accumulated depreciation x %depreciation

8
Q

What are the 5 steps of asset disposal?

A

Step 1: Take out the cost price of the asset you are selling
Debit: Asset disposal
Credit: Asset (Vehicles)

Step 2: Take out the accumulated depreciation on the asset you are selling
Debit: Provision for depreciation
Credit: Asset disposal

Step 3: How do you sell the asset?
Debit: Bank/Creditor/Debtor
Credit: Asset disposal

Step 4: Calculate if you made a profit/loss on sale of asset
If you add to the debit side = Profit
If you add to the credit side = Loss

Step 5: Calculate the depreciation on the remaining assets