Straight Line Depreciation

Capital Expenditure is expenditure which belongs to more than one accounting period (i.e. a business benefits in more than just that period).  It is then depreciated over its expected lifetime.

Two methods are covered here  – Straight Line and later Reducing Balance

Straight Line

–        1 Simply x% of cost price less any residual value (scrap value)

–        Or

–        2 Using this formula

Cost – Residual Value    =              annual depreciation charge to the

number of years                              Income Statement

In the income statement it would look like this: -

Income Statement (extract)         

Less expenses

Provision for Depreciation                                           xxx

In the Balance Sheet the amount of depreciation for this year is ADDED to the previously outstanding provision to give a new, larger provision of accumulated depreciation which can be put into the new balance sheet.

In other words if an asset is being depreciated by £3000 per year and had a provision of £6000 previously the balance sheet would then show depreciation to now be £9000.  To summarise this is the 3^rd year we have depreciated it (i.e. 9000/3000 = 3 years).  The amount of the cost price less the accumulated depreciation is known as the net book value (NBV) and this is used for reducing balance depreciation and also for calculating the profit or loss on disposal of the asset.

Balance Sheet (extract)

Non Current Assets

Machinery                                  12,000

less Provision for Depreciation      9,000

(Net book Value)                                                     3000