Slide 26.1

Wood and Sangster, Frank Wood's Business Accounting Volume 1 Power Points on the Web, 11th Edition © Pearson Education Limited 2008

Causes of depreciation

• Physical deterioration• Wear and tear

• Erosion, rust, rot and decay

• Economic factors• Obsolescence

• Inadequacy

• Time• Depletion

Slide 26.2

Wood and Sangster, Frank Wood's Business Accounting Volume 1 Power Points on the Web, 11th Edition © Pearson Education Limited 2008

Straight line method

If a lorry was bought for £22,000, would be kept for four years, and then be sold for £2,000, the depreciation to be charged each year would be:

Cost (£22,000) – Estimated disposal value (£2,000)

Number of expected years of use (4)

= £5,000 depreciation each year for four years.

Slide 26.3

Wood and Sangster, Frank Wood's Business Accounting Volume 1 Power Points on the Web, 11th Edition © Pearson Education Limited 2008

Reducing balance method

If a machine is bought for £10,000 and depreciation is to be charged at 20%, the calculations for the first three years would be as follows:

£Cost 10,000First year depreciation (2,000)

8,000Second year depreciation (20% of £8,000) (1,600)

6,400Third year depreciation (20% of £6,400) (1,280)Cost not yet apportioned, end of year 3 5,120

Slide 26.4

Wood and Sangster, Frank Wood's Business Accounting Volume 1 Power Points on the Web, 11th Edition © Pearson Education Limited 2008

Other methods of calculating depreciation

• Straight line method• Reducing balance method• Revaluation method• Depletion unit method• Machine hour method• Sum of the years’ digits method• Units of output method