Depreciation
Depreciation — the amount of value an asset loses each year due to 'wear and tear' (becoming obsolete, outdated or no longer efficient).
Why we account for depreciation
- It shows how much value the assets lost during the year.
- It follows the prudence principle.
Methods of depreciation
- Straight-line = (Cost − Residual value) ÷ Estimated useful life (years)
- Reducing balance = (Cost − All previous depreciation) × %
- Revaluation = Opening value + Purchases for the year − Closing value