Depreciation is recorded in profit and loss account as a business expense. Also on the balance sheet “to reflect the fall in the market value of the asset”
you can sell depreciated assets for their residual value. Some times the residual value is 0
There are two ways to measure depreciation
straight line method
units of production method
Straight line method
the value of the asset falls by the same amount each year
Advantages
easy to calculate
good for assets that have a known shelf life (like batteries or cereal)
Accurate for assets that are used regularly (i.e. furniture) over their lifetime
Easy for historical comparisons of data, since the depreciation value is the same each year
Disadvantages
Not all assets depreciate uniformly (i.e. cars depreciate the most right when you drive away with them)
Assets do not depreciate uniformly because they have higher repair/maintenance costs (i.e. cars, machinery)
Not suitable if you cannot estimate the life span of the product
Units of production method
calculates depreciation based on usage of an asset
so a car would depreciate more if you drive more km on it
units of production means the expected output from the machine
Advantages
more accurate to use this method
More accurate for non-current assets that depreciate due to wear and tear, not just passage of time
