2nd Year Business Studies

23rd January 2013

Depreciation

Depreciation

Depreciation

Depreciation

€225,000

DepreciationO Depreciation is when a fixed asset

goes down in value for one of the following reasons:

1. Because it has got older2. Because it has been used a lot3. Because it has gone out of date

DepreciationO So what will a firm do to recognise

that its fixed assets are decreasing in value?

O They reduce the fixed asset value by a certain amount each year. This amount is called Depreciation

O Depreciation is usually a percentage of the cost of the fixed asset

DepreciationO E.g. Equipment cost €40,000. It is to be

depreciated over 10 years at the rate of 10% of cost.

O Step 1: €40,000 X 10% = €4,000O This is the depreciation expense for the

trading, profit & loss accountO Step 2: Reduce the value of the fixed

asset in the balance sheet by €4,000O €40,000 - €4,000 = €36,000O €36,000 is the Net Book Value (NBV)

Balance SheetFixed Assets

Cost Depreciation

NBV

Equipment 40,000 4,000 36,000