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Reducing balance method for depreciation
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Reducing balance method for depreciation

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A presentation outlining the reducing balance method for depreciation. This is a new skill required of VCE students in the new VCE Accounting Study Design and attempts to explain the concept in plain …

A presentation outlining the reducing balance method for depreciation. This is a new skill required of VCE students in the new VCE Accounting Study Design and attempts to explain the concept in plain English.

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Transcript

  • 1. Tell me the story! A forklift purchase for a warehouse!At time of purchase …..5 years later
  • 2. Is there an impact on the Financial Statements?Profit and Loss Balance Sheet Statement Cash Flow StatementIf so how, which, what, where, why?
  • 3. Depreciation• A non-current asset undergoes wear and tear, so that its expected selling price declines over time.• Depreciation is the allocation of the cost of a non current asset over its effective working life• The difference between a non-current asset’s original purchase price and its final selling price is allocated as an expense each year called depreciation
  • 4. Cost of non-current asset• The original cost (historical cost)• Any other costs required to get the asset into a condition to be able to earn revenue $$$$
  • 5. Farmer Fred!Fred owns a sheep and cattle farm. A variety ofmachinery helps him to successfully run thisfarm.
  • 6. Purchase of a Tractor• Farmer Fred wants to add a front end loader to his new tractor purchase on 1 July 2012. Cost $70000 $10000 for the front end loader Cost of installation $1000 Historical cost = $70000+$10000+$1000=$81000
  • 7. The value of the tractorPurchase Price = $81000Estimated scrap value = $21000Fred expects to keep it for 5 years (Useful Life)
  • 8. Calculating Depreciation Two methods studiedStraight Line Diminishing Balance Unit 3 Unit 4 Same amount Amount of expensed each depreciation reporting reduces each period reporting period
  • 9. How do you knowwhich depreciationmethod to choose?
  • 10. Reducing Balance Method• Reducing balance method is used when….a non-current asset is more efficient in its earlieryears of its life. The asset does not breakdownas much, and repairs are kept to a minimum. Asit gets older it is likely to be out of operation forperiods of time while it is being repaired.Income needs to be matched with expensesover that time.
  • 11. Straight Line DepreciationThe formula:- Including costs incurred to get non current asset ready to earn revenue Cost – Scrap Useful Life
  • 12. Reducing Balance DepreciationCalculating the amount of depreciation Including costs incurred to get non current asset ready to earn revenue Cost – Scrap X 1.5 Useful Life
  • 13. Tractor$81000 - $21000 (scrap value) 5 (years)=$12000 depreciation x 1.5= 22% per annum
  • 14. Where does depreciation appear? General journal The General Ledger Depreciation Tractor Accumulated Depreciation (expense) Tractor Balance Sheet Profit and Loss Non current Assets Tractor Less accumulated depreciation
  • 15. How does it look?Tell me the story of what you can see in the figures above?
  • 16. • Where will each of the above calculations appear in the financial statements? Why do they appear there?• How would it be different if straight line depreciation was used?
  • 17. Which depreciation method would you use for each of the following? 1. Draw up a table with 3 columns/9rows 2. List the non-current asset 3. Choose the method 4. Explain and justify your choice
  • 18. Tool Chest
  • 19. 1. Woolshed and 2. The sheepyards
  • 20. Furniture andFittings
  • 21. Shop shelving
  • 22. Reducing Balance Depreciation in a Word Cloud• Goto http://www.wordle.net and create your own word cloud – “reducing balance depreciation in a wordle”
  • 23. or…Find all the term(s) in the above word cloud andexplain their relevance to depreciation.
  • 24. • Reflections• What did you find easy?• What did you find most challenging?• What do you need to do?
  • 25. Make it 24/7• Upload to• Podcast this and add to• Get students to add comments to a teacher blog post

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