Depreciation is one of the most difficult accounting concepts to learn. This is because it isn't a cash transaction. Rather, it's classified as a noncash transaction that's deducted from total asset value, added to accumulated depreciation and written off of the income statement. There are various ways to calculate the depreciation expense for revalued assets; however, the straight-line method is the most popular.
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Depreciation is a type of writedown. Although any asset can be written off, only certain assets can be depreciated. Specifically, the asset must have a long-term useful life; that is, it must provide income to the company over a period of time that's greater than one tax year. Depreciation is an attempt to more closely match the usage of assets with the period they produce revenue in.
There are three main variables in the straight-line method: useful life, asset cost and salvage value. Each one affects the depreciation expensed on an annual basis. Using the straight-line method, depreciation is calculated by subtracting the salvage value of the asset from the cost of the asset and then dividing by the asset's useful life.
You can determine the useful life of the asset by using your own experience with the asset, asking the dealer or seller of the asset or looking at the asset warranty. The salvage value can be estimated by consulting an appraiser or salvage yard. The cost of the asset is the amount you purchased the asset for --- this isn't the value of the asset at the time of purchase but the actual amount paid.
Effect of Revalued Assets on Depreciation
If the value of the asset changes over time, it doesn't affect the original cost of the asset, only the salvage value. This creates the need to adjust the remainder of the cost of the asset over the useful life. For instance, if the useful life of a £9,750 truck is five years, and it has a salvage value that has increased from £3,250 to £6,500, the depreciation expense changes from £9,750 minus £3,250 divided by 5 --- or £1,300 per year --- to £9,750 minus £6,500 divided by 5, or £650 per year. If the value of the asset increases or decreases, you have paid too much or too little in depreciation, respectively.
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