Depreciation and Inventory
Depreciation is the permanent and gradual decrease in the value of a fixed asset. Fixed assets are long-term items like machinery, furniture, or vehicles used in a business. These assets lose value over time due to regular use, wear and tear, or becoming outdated. Depreciation is a non-cash expense. This means that while it reduces the profit in the books, no actual money leaves the business bank account.
Concepts (3)
This method assumes that the goods you bought first are the ones you sell first. Imagine a milk shop. The shopkeeper always puts the oldest milk packets at the front.
This method assumes that the goods you bought first are the ones you sell first. Imagine a milk shop. The shopkeeper always puts the oldest milk packets at the front. In accounting, this means the remaining stock in the warehouse is valued at the most recent prices. This gives a very realistic value for assets on the balance sheet.
This is the simplest way to calculate depreciation. You spread the cost of the asset equally over its useful life. For example, if a machine costs 1,00,000 rupees and has a life of 10 years, the annual depreciation is 10,000 rupees.
This is the simplest way to calculate depreciation. You spread the cost of the asset equally over its useful life. For example, if a machine costs 1,00,000 rupees and has a life of 10 years, the annual depreciation is 10,000 rupees. It is easy to use and understand. It is best for assets like furniture where the usage is consistent every year.
In this method, depreciation is calculated as a fixed percentage of the book value at the start of the year. Since the book value drops every year, the amount of depreciation also decreases. For example, 10% on 1,000 is 100 in Year 1.
In this method, depreciation is calculated as a fixed percentage of the book value at the start of the year. Since the book value drops every year, the amount of depreciation also decreases. For example, 10% on 1,000 is 100 in Year 1. In Year 2, it is 10% of 900, which is 90. This method is more realistic for machinery that loses more value in early years.
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