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Date__________________________
What is Depreciation?
Definition
Depreciation is the concept that assets decrease in value over time.
For example, this happens with cars that lose about 10% of its value as soon as you bought it, even if
it has never been driven.
Source: http://www.duncanwil.co.uk/jpg%20files/sldepr.jpg
Source: computersciencesource.wordpress.com
Year
0
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12,000
12,000
10,000
10,000
8,000
8,000
6,000
6,000
4,000
4,000
2,000
2,000
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0
Depreciation Value
Depreciation Value
Notice how the depreciation value (how much the asset depreciates each year) changes differently in
each method and consequently the current value of asset
Depreciation Exercises
Question 1
What would happen if a car cost 15,000 and is depreciated at a rate of 10%?
Year
Simple Depreciation
Current Value of Asset Depreciation Value
15,000
Compound Depreciation
Current Value of Asset Depreciation Value
15,000
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10
Question 2
What would happen if a computer cost 1500 and is reduced at a rate of 25%?
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Question 3
Which depreciation method would you choose for a business that has a van worth 25,000? You must
choose from a straight line 10% method or a reducing balance 30% method?
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Extension Task
Why might a business reduce the value of its assets?
Which is more realistic, reducing balance method or straight line method? Justify your answer