Balance Day Adjustments
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Transcript of Balance Day Adjustments
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Balance Day Adjustments
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What is a Balance Day
The Last day of Accounting Year
Example: 31 March 20XX
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What is Depreciation
• Depreciation is specifically defined as the systematic allocation of the depreciable amount of an asset over its useful life.
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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
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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
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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
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Straight line Method
• Depreciation: Cost – Salvage value
Useful life of the asset
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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
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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
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Depreciation :(Cost – Residual Value) X Usage in the year Estimated total usage
Units of Use method