Depreciation Accounting
What is Depreciation Accounting?
The systematic allocation of the depreciable amount of an asset over its useful life.
Key formula / rule: Depreciable Amount
Key points
- Understand the concept and purpose of depreciation.
- Identify assets that are subject to depreciation.
- Calculate depreciation using different methods.
- Record depreciation entries in the books of accounts.
Common exam trap
Confusing depreciation with asset valuation.
Definitions
- Term
Depreciation
- Meaning
The systematic allocation of the depreciable amount of an asset over its useful life.
- Term
Useful Life
- Meaning
The period over which an asset is expected to be available for use by an entity, or the number of production or similar units expected to be obtained from the asset by the entity.
- Term
Residual Value (Salvage Value)
- Meaning
The estimated amount that an entity would obtain at the end of the useful life of an asset, after deducting the estimated costs of disposal.
- Name
Accumulated Depreciation
- Meaning
The total depreciation charged on an asset from the date of its acquisition to the reporting date. It is shown as a deduction from the asset's original cost on the balance sheet.
Learning objectives
Understand the concept and purpose of depreciation.
Identify assets that are subject to depreciation.
Calculate depreciation using different methods.
Record depreciation entries in the books of accounts.
Explain the impact of depreciation on financial statements.
Formulae
- Name
Depreciable Amount
- Note
The total amount to be depreciated over the asset's life.
- Expression
Cost of Asset - Residual Value (Salvage Value)
- Name
Straight-Line Method (SLM) - Annual Depreciation
- Note
Provides a uniform charge each year.
- Expression
Depreciable Amount / Useful Life (in years)
- Name
Written-Down Value (WDV) Method - Annual Depreciation
- Note
Depreciation amount decreases each year.
- Expression
Depreciation Rate (%) * Book Value at the beginning of the year
- Name
Book Value (Net Book Value)
- Note
The value of the asset shown on the balance sheet.
- Expression
Original Cost - Accumulated Depreciation
Prerequisites
Basic accounting principles (e.g., accrual basis, matching principle).
Understanding of tangible assets.
Concept of asset cost and useful life.
Common mistakes
Confusing depreciation with asset valuation.
Incorrectly estimating useful life or residual value.
Applying depreciation to assets with indefinite lives (e.g., land).
Errors in calculating annual depreciation amounts.
Not accounting for depreciation in the correct accounting period.
Keywords
Depreciation
Asset Allocation
Useful Life
Residual Value
Straight-Line Method
Written-Down Value Method
Matching Principle
Book Value
Accumulated Depreciation
Tangible Assets
Practice preview
What is the primary objective of charging depreciation on fixed assets?…
easy
Under the Straight-Line Method of depreciation, how is the annual depreciation amount calculated?…
easy
Which of the following is NOT a factor considered when calculating depreciation?…
easy