5 questions foundWhat is depreciation?
Beginner The systematic allocation of the cost of a tangible fixed asset over its useful life, reflecting the wearing out or consumption of the asset.Machine cost 10,000, life 5 years -> 2,000 expense per year (straight line)Real-world example Spreading a delivery van's cost over the years it helps generate revenue.How does the straight-line method work?
Intermediate It charges an equal amount each year: (cost - residual value) / useful life.(10,000 - 1,000) / 5 = 1,800 per yearReal-world example Used for assets that give even benefit over time, like fixtures.How does the reducing-balance method work?
Intermediate It applies a fixed percentage to the asset's carrying (net book) value each year, giving higher charges early on.Cost 10,000 at 20%: Yr1 2,000; Yr2 20% of 8,000 = 1,600Real-world example Suits assets that lose value fast early, like vehicles or IT equipment.Debit depreciation expense and credit accumulated depreciation (a contra-asset), leaving cost untouched.Dr Depreciation Expense 1,800
Cr Accumulated Depreciation 1,800Real-world example Net book value = cost - accumulated depreciation on the balance sheet.Depreciation spreads the cost of tangible assets, amortization spreads intangibles (e.g. patents, software), and impairment is a one-off write-down when an asset's recoverable amount falls below its carrying value.Machine -> depreciation; Patent -> amortization; Sudden value drop -> impairmentReal-world example Writing goodwill down after a failed acquisition is an impairment, not depreciation.