Study Notes
Depreciation is the systematic allocation of the cost of a non-current asset over its useful economic life, reflecting the reduction in value due to usage, wear and tear, or obsolescence.
- Non-Current Assets — resources owned by a business expected to provide economic benefits for more than one accounting year. Example: Machinery, vehicles, buildings, and equipment.
- Depreciation — the systematic allocation of an asset's cost over its useful life. Example: A machine costing 2,000.
- Straight Line Method — charges equal depreciation amounts each year. Example: A building with a cost of 20,000 over 10 years has an annual depreciation of $8,000.
- Reducing Balance Method — applies a fixed percentage to the declining book value each year. Example: A vehicle costing 2,000.
Exam Tips
Key Definitions to Remember
- Non-Current Assets
- Depreciation
- Straight Line Method
- Reducing Balance Method
Common Confusions
- Confusing straight line with reducing balance methods
- Misunderstanding the impact of depreciation on financial statements
Typical Exam Questions
- What is depreciation? Depreciation is the systematic allocation of an asset's cost over its useful life.
- How do you calculate straight line depreciation? Use the formula: (Cost - Residual Value) ÷ Useful Life.
- What is the reducing balance method? It applies a fixed percentage to the declining book value each year.
What Examiners Usually Test
- Understanding of different depreciation methods
- Ability to calculate depreciation using given methods
- Impact of depreciation on financial statements