There are two main methods of depreciation which you should know about at this stage of your studies, namely straight line and reducing balance depreciation.

   Straight Line: this means the cost of the asset is written off (deducted in the profit and loss
                           account) over its expected useful life after it'sexpected scrap value has
                           been deducted. Each year the charge for depreciation will be the same until
                           the asset is either sold or completely written off.
    Reducing balance: here the cost of the asset is written off over its expected life by
                                    applying a fixed percentage to the remaining balance of the item
                                    shown in the books.

Les has just acquired an asset which cost £12,750. He has asked you to show him what the effect would be of depreciating the asset using:
straight line over five years, or
reducing balance at 20% p.a.
Assume there is a scrap value of £250 involved.
                                                                                                                                            
A businessman buys a van for £8,000 at the beginning of the first year of trading. He intends to use it in the business for 4 years and estimates that the van can be sold for £2,000 at the end of the fourth year. Calculate the annual depreciation expense using the straight line method.

Complete the following grid for the van. The grid is designed to show the relevant figures for balance sheets at the end of years 1,2,3 and 4. The first two years have been completed in order to get you started. Assume that the van was still owned at the end of Year 4.

                                Cost         Accumulated Depreciation         Net Book Value

At end of Year 1:     8,000                     1,500                                     6,500
At end of Year 2:     8,000                                                                   5,000
At end of Year 3:
At end of Year 4:
                                                                                                                                     

In this example the businessman decides to use the reducing balance method for calculating depreciation. Calculate depreciation for years 1 to 4 using a rate of 30%. and complete the following table.
                                Cost         Accumulated Depreciation         Net Book Value
At end of Year 1:
At end of Year 2:
At end of Year 3:
At end of Year 4:
                                                                                                                               
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Straight line depreciation
        £12,750 less the scrap value of £ 250 comes to £12,500. This is to be depreciated
        equally  over 5 years so the next step is to divide £12,500 by 5 years and this = £2,550
 return to question 1

Straight line depreciation
                  Cost        Acc Depreciation    Net Book Value

Year 1        8,000        1,500                            6,500
Year 2        8,000        3,000                            5,000
Year 3        8,000        4,500                            3,500
Year 4        8,000        6,000                            2,000
 
return to question 2

Reducing balance depreciation
                  Cost        Acc Depreciation    Net Book Value

Year 1        8,000        2,400                            5,600
Year 2        8,000        4,080                            3,920
Year 3        8,000        5,256                            2,744
Year 4        8,000        6,079                            1,921
 
 return to question