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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 English.

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### Reducing balance method for depreciation

1. 1. Tell me the story! A forklift purchase for a warehouse!At time of purchase …..5 years later
2. 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. 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. 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. 5. Farmer Fred!Fred owns a sheep and cattle farm. A variety ofmachinery helps him to successfully run thisfarm.
6. 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. 7. The value of the tractorPurchase Price = \$81000Estimated scrap value = \$21000Fred expects to keep it for 5 years (Useful Life)
8. 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. 9. How do you knowwhich depreciationmethod to choose?
10. 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. 11. Straight Line DepreciationThe formula:- Including costs incurred to get non current asset ready to earn revenue Cost – Scrap Useful Life
12. 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. 13. Tractor\$81000 - \$21000 (scrap value) 5 (years)=\$12000 depreciation x 1.5= 22% per annum
14. 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. 15. How does it look?Tell me the story of what you can see in the figures above?
16. 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. 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. 18. Tool Chest
19. 19. 1. Woolshed and 2. The sheepyards
20. 20. Furniture andFittings
21. 21. Shop shelving
22. 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. 23. or…Find all the term(s) in the above word cloud andexplain their relevance to depreciation.
24. 24. • Reflections• What did you find easy?• What did you find most challenging?• What do you need to do?