In this section, we will learn about depreciation and we will see how to calculate depreciation using
three different methods.
If you have seen a profit and loss statement, you would have noticed that there is often this expense
item called depreciation, which is subtracted from the total revenue.
The precision is basically an accounting process to compensate for the cost of asset that you have incurred
initially over the life of the asset.
So, for example, if you buy a new machinery for your plant, which costs you nearly 10000 thousand
dollars.
And after 10 years, that machinery is going to be of zero value.
Then you can say that every year that particular machinery is losing some value.
So that at the end of 10 years, it will be having non-value.
To account for this decline in value of that particular asset.
Over the bit of time we subtract the decline from our income statement.
This is a non-cash expense, that is you do not have to pay out cash, the cash does not move out of
your organization.
However, because the value is declining and you want to show that decline in value, you are showing
this as an expense.
Now, when you have an asset which is losing value over time, what amount of value will lose in each
year?
Depends on which particular method of calculating depreciation you are using.
There are several popular methods to calculate the precision we are covering the three most popular
ones.
The first is called Straight-line Method, which is the easiest one to implement.
Then we will talk about double declining balance, which is a bit complicated, but it is very popular.
And the third one, which we will discuss is some of your didit, which is also a bit complicated than
the StreetLink method, but again, it is popular.
So we'll be discussing.
Tony Straight-line method of calculating the precision, we basically first see what is the value of
asset that will be lost over the period of time.
So initially, the value of the asset is the cost at which you buy that asset.
And the salvage value that is the final value of that asset is the value at which you are able to sell
it off after some amount of time.
The difference between these two is the amount of value that is lost over the period of time.
The second important barometer is what is the useful value of that asset?
So if that asset will work well for the next five years, so the useful life of that asset is five years.
If you are planning to use an asset for only three years, the useful life of that asset is three years.
When you have these two values, one is the value lost all the time and the other is the useful life,
you just have to divide these two values to get the depreciation you have to take for each year.
For example, if you buy an asset for fifty thousand dollars and after five years, you sell it off
for ten thousand dollars.
So to value that asset lost in five years is 50000 minus 10 million, which comes out to 40000.
Forty thousand is lost over five years, so each year we will take eight thousand dollars as the depreciation
value.
This 8000 will be taken for the next five years, so all the five year period, we will accommodate
the 40000 loss of value in our income statement.
So this is the simplest way of appreciating any asset, we simply take a straight line method where
the asset is depreciating at a fixed value each year.