Depreciation

Question 1

What is meant by the term Asset in relation to a business?

Answer 1

Items that a business owns e.g a van, furniture, machines…

Question 2

What us meant by the term depreciation?

Answer 2

The reduction in the value of an asset over a period of time

Question 3

What are the causes of depreciation?

Answer 3

• USE- e.g. the more you ise a van, the more miles gone on the van the more it will depreciate and fall in value
• AGE- asset becomes more older meaning it loses value and depreciation will be greater
• OBSOLESCENCE- asset becomes no use to anyone, end of its working life, something replaces it

Question 4

What is the purpose of calculating depreciation?

Answer 4

For the purpose of accurate accounting and valuation of the business

Question 5

What is depreciation to a business?

Answer 5

• Depreciation is a cost/expense to a business

* Depreciation will make the value of assets fall

Question 6

What are the 2 ways to calculate depreciation?

Answer 6

• Straight line method

* Reducing balanced method

Question 7

What is the most simplest way to calculate depreciation?

Answer 7

Straight line method

Question 8

Why is the straight line method the simplest method to calculating depreciation?

Answer 8

Because this method assumes that depreciation is a constant amount over a period of time

Question 9

What pieces of information do you need to know when calculating depreciation through the straight line method?

Answer 9

• Initial value of the asset- how much it cost to purchase the asset when it was new.
• Estimated residual value- what is it estimated that the value of the asset will be at the end of its use
• Expected life of the asset- how long the asset will last.