Balance Day Adjustments

What is a Balance Day

The Last day of Accounting Year

Example: 31 March 20XX

What is Depreciation

• Depreciation is specifically defined as the systematic allocation of the depreciable amount of an asset over its useful life.

Remember

The depreciable amount of the asset is its cost less residual

value.

Residual value is the amount the business thinks it might

receive at the end of the assets useful life when it sells

the asset

Important notes

Depreciation is a measure of the use of an asset (consumption of future benefit).

Depreciation is a method of allocating cost - to recognise use of the asset

Depreciation is based on historical cost

When accumulated depreciation is subtracted from the historical cost of the asset the result is called the carrying amount

Methods and when to use

Straight line depreciation

• Is used when the pattern of usage of an asset and the contribution it makes towards generating revenue occurs evenly throughout its useful lifetime

• Is often based on a percentage applied to cost with the assumption that the residual value is taken as zero

Straight line Method

• Depreciation: Cost – Salvage value

Useful life of the asset

Diminishing value

• Is used when assets wear out quickly or are likely to contribute more to revenue in the earlier years of their useful life

Units of use method

• Is used when an assets life can be readily measured in units, for example hours, kilometres, and the asset’s use may vary from period to period

Depreciation :(Cost – Residual Value) X Usage in the year Estimated total usage

Units of Use method