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Hamish (Student) March 10 2016
It is a way of measuring the amount of the fall in value of NCAs over a period of time. It is perceived as a measure of the consumption of the asset over its useful economic lifetime.
It is a non-cash expense.
The two most common methods of calculating depreciation are:
Depreciation is calculated using the following formula:
(cost of the asset-residual value)/ nr of years an asset is expected to be used for
Reducing balance method
A fixed percentage is written off the reduced balance each year.
The reduced balance is the cost of the asset less depreciation to date.
The differences between the 2 methods are:
-Depreciation amount is the same each year when using the straight line method, reducing balance method on the contrary provides us with different money amounts each year: more than the straight line in the early years, less in the later years,
-When using the straight-line method, lower depreciation percentage is required to achieve the same residual value as with the reduced balance method,
-Straight-line method is suitable for fixed assets that are likely to be kept for the whole of their expected lives, whereas reducing balance method is best used for non-current assets which appreciate more in the early years and are not kept for the whole of their expected lives.see more