IB Business and Management ACCOUNTS & FINANCE 3.5 Depreciation

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IB Business and Management ACCOUNTS & FINANCE: 3.5 Financial Accounts Depreciation

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IB Business and Management .com IB Business and Management T he IB Diploma Business and Management course delivered IN STYLE , ONLINE . ©

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z depreciation HL

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z depreciation Because sometimes, assets just lose their value over time HL Appreciation : ↑ in value of fixed assets over time depreciation : ↓ in value of fixed assets over time

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z depreciation Wear & tear HL depreciation : ↓ in value of fixed assets over time Obsolete assets Changes in the value of fixed assets are shown by reassessing the value of the assets on a balance sheet

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z Calculate the value of a business more accurately (financial position) depreciation : ↓ in value of fixed assets over time Realistically assess the value of fixed assets over time Why depreciate??? HL Plan for the replacement of assets in the future Must be accounted for when placing the value of the fixed assets on the balance sheet

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z How to depreciate I Straight-line HL A paper company buys 10 copiers @ $5,000 each. They are expected to last 5 years Year end Depreciation ($) Book value ($) 0 - 50,000 1 10,000 40,000 2 10,000 30,000 3 10,000 20,000 4 10,000 10,000 5 10,000 0 Annual depreciation Purchase cost lifespan = Annual depreciation ? $10,000 Graph this Why’s it called straight- line depreciation???

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z Resale value??? HL A paper company buys 10 copiers @ $5,000 each. They are expected to last 5 years & be sold for 30% of purchase price Year end Depreciation ($) Book value ($) 0 - 50,000 1 7,000 43,000 2 7,000 36,000 3 7,000 29,000 4 7,000 22,000 5 7,000 15,000 Annual depreciation Purchase cost- residual value lifespan = Annual depreciation ? $7,000 + simple to understand - Not realistic i.e. cars + simple to understand

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z How to depreciate Ii Reducing balance HL A paper company buys 10 copiers @ $5,000 each. They are expected to last 5 years. Depreciation rate = 25% Year end Depreciation ($) Book value ($) 0 - 50,000 1 12,500 37,500 2 9,375 28,125 3 7,031 21,094 4 5,274 15,820 5 3,954 11,866 Net book value = historical cost – cumulative depreciation Do 1 st then fill in other column Question 3.5.6, p. 407 Graph the book value.

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z Can’t touch this Hammer time!! Intangible assets HL Non-physical assets Can’t touch ‘ em Amortization : like depreciation to reduce the value of non-physical fixed assets on a balance sheet Generate income & add value to a business

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