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Money Bag

Unit 3 - Finance & accounts - QB

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Chart Increasing

Unit 1 - Introduction To Business Management - QB

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Briefcase

Unit 2 - Human Resource Management - QB

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Direct Hit

Unit 4 - Marketing - QB

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Factory

Unit 5 - Operations management - QB

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Bar-Chart

Unit 6 - Assessment

The drop in the value of long-term (non-current) assets over time.

&nbsp;

💡 Did you know? Depreciation is a non-cash expense. So, it&rsquo;s like growing older but not spending money on it. We jot it down on the profit and loss account to find out the profit before interest and tax!

<ul>
	<li>Wear and Tear
	<ul>
		<li>Example: Your car&#39;s value drops the more you drive it around (and the more scratches it gets in the parking lot 😬).</li>
		<li>It&#39;s like a toy. The more you play with it, the more it wears out.</li>
	</ul>
	</li>
	<li>Obsolescence
	<ul>
		<li>Example: Remember the iPhone 5? New versions can make the older ones feel like ancient artifacts!</li>
		<li>It&#39;s like being the cool kid with last season&#39;s sneakers when everyone else has the newest ones. The old ones aren&rsquo;t as valuable anymore.</li>
	</ul>
	</li>
</ul>

<ul style="list-style-type:square">
	<li>Straight-Line Method
	<ul>
		<li>This method evenly spreads out the cost of an asset over its lifetime. Think of it as eating a chocolate bar in equal parts over several days.</li>
	</ul>
	</li>
	<li>Formula
	<ul>
		<li><code>Annual Depreciation = (Original Cost - Residual Value) / Expected Useful Life of Asset </code></li>
		<li>Example: ABC Company bought a car for $30,000 in January. In 4 years, it&#39;ll be worth $6,000. Depreciation for that year is $6,000. But if bought in July, it&#39;s only $3,000 as half the year is gone!</li>
	</ul>
	</li>
	<li>Pros
	<ul>
		<li>🍰 Piece of cake to calculate.</li>
		<li>👍 Works well for items like furniture.</li>
	</ul>
	</li>
	<li>Cons
	<ul>
		<li>🚫 Not ideal for pricier assets.</li>
		<li>🚗 Cars lose more value in the 1st year, which this doesn&#39;t consider.</li>
		<li>📱 Tech changes make some items outdated fast!</li>
	</ul>
	</li>
	<li>Units of Production Method
	<ul>
		<li>This focuses on how much the asset is used. More usage = more depreciation.</li>
	</ul>
	</li>
	<li>Formula
	<ul>
		<li><code>Depreciation Expense = [(Cost - Salvage Value) / Estimated Total Units to be Produced] &times; Actual Units Produced </code></li>
		<li>Example: For a photocopier costing $4,000, expecting 200,000 prints in its life and having a scrap value of $500, if it made 40,000 prints this year, its depreciation would be $700.</li>
	</ul>
	</li>
	<li>Pros
	<ul>
		<li>📉 Accurately reflects wear and tear.</li>
		<li>💰 Matches revenues with expenses.</li>
	</ul>
	</li>
	<li>Cons
	<ul>
		<li>👩&zwj;🏭 Only suitable for manufacturers.</li>
		<li>🚫 No-go for tax calculations.</li>
		<li>💡 Calculations can get a bit tricky.</li>
	</ul>
	</li>
</ul>

🤔 Which Method to Choose? Depends on factors like the asset&#39;s cost, how it loses value, and tax considerations.

&nbsp;

Real-world Takeaway: Imagine two toys. One toy wears out just by the passing of time (like a battery-operated toy losing power over time) - that&rsquo;s like straight-line depreciation. The other toy wears out based on how much it&rsquo;s played with - like a Rubik&rsquo;s cube getting stickers peeled off with intense solving sessions, that&rsquo;s like the units of production method!

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🎉 Good luck with your studies! Remember, assets may depreciate, but knowledge appreciates! 🚀📚

Understanding Depreciation: Methods & Impacts on Assets

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Higher Level

Business Management HL

Unit 3 - Finance & accounts - QB

Understanding Depreciation: Methods & Impacts on Assets

Table of content

Definition

Why do assets depreciate?

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Unit 3 - Finance & accounts - QB

Understanding Depreciation: Methods & Impacts on Assets

Table of content

Definition

Why do assets depreciate?

Unlock the Full Content!