What comes in to your mind when you hear the word Depreciation? Me? I think it is about losing assets in daily market. I hope what I'm thinking is correct. So we tackled this lesson last Thursday (June 28, 2012) and discussed about it for 3 hours. Here it goes, Depreciation is the lost in value of physical assets through its use. The yearly deposits in funds called depreciation charges.
DEPRECIATION = COST - SCRAP VALUE
What is cost? Cost is an amount that has to be paid in order to get something. In business, cost in usually a cycle of effort, material, resources, time and utilities consumed, risks and opportunities. All expenses are costs, but not all costs are expenses.
What is scrap value? Scrap value is the worth of a physical asset's individual components when the asset itself is deemed no longer usable. The individual components, known as "scrap," are worth something if they can be put to other uses. Sometimes scrap materials can be used as is; other times they must be processed before they can be reused. An item's scrap value is determined by the supply and demand for the materials it can be broken down into.
Here's an example: Cara has a very old car with a transmission that is shot. Because the cost to replace the transmission ($2,000) is significantly more than what the car would be worth even with a working transmission ($1,000), Cara decides to sell the car for its scrap value. He takes it to a junkyard where the car's usable parts and metal are valued at $500. Therefore, $500 is the car's scrap value.
Okay now I'll give you an example problem regarding the formula that was given:
Problem: A Nokia phone costs P5000 and is usable for 6 years. it's scrap value is just P200.
a) What is the average yearly depreciation?
b) What is the depreciation schedule?
Solution:
a) Depreciation= Cost- Scrap value
= 5000 - 200
Depreciation= P4800
Average yearly depreciation= 4800 / 6
* The average yearly depreciation is P800.
b) Depreciation schedule
YEAR DEPRECIATION CHARGE AMOUNT OF DEP. FUND BANK VALUE OF THE YR.
0 0 0 5000
1 800 800 4200
2 800 1600 3400
3 800 2400 2600
4 800 3200 1800
5 800 4000 1000
6 800 4800 200
A Depreciation schedule is an accounting procedure for determining the amount of value left in a piece of equipment. There are several methods for calculating depreciation, generally based on either the passage of time or the level of activity (or use) of the asset. Depreciation schedules are used in the calculation of taxes as a business is allowed to deduct each year a fraction of the total value of certain assets.
So there you have it, all about losing, calculating and determining where your money went. At first studying this business things sounds boring, but as time goes by, you will get a hang of it and relate this on every business you know. This is a big help for us, even though we're still studying, in 2 to 3 years we will need this in our jobs, or our work. :)
Checked by: Prof. Cris Paner
