Depreciation Methods

In: Business and Management

Submitted By zfarah
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To start at the beginning, an asset's value is an indication of the economic benefit that will flow towards an entity. Depreciation is the lessening of value continuously on an asset that is being used (for example over a period of 5 years). As for example a vehicle is used, wear and tear occurs and depreciation is therefore written off on the vehicle (as less economic benefits will flow to an entity now that the vehicle has been used). Whereas impairment on the other hand, is when an asset's value suddenly drops. For example when a car gets damaged from an accident and is no longer worth what is was before the accident, the difference will be impairment. Impairment is also common in loans receivable from other companies, as the company who the money was lent to might become bankrupt and suddenly not be able to repay the loan. The loan balance will therefore be impaired
Depreciation means the depreciable amount of an asset (cost/revalued amount less residual value) is allocated on a systematic basis over its useful life.

Depreciation = Depreciable amount / Useful life

Impairment means when an asset/s carrying amount is exceeds its recoverable amount, the amount over recoverable amount should be write off from carrying amount and present in Balance Sheet. This process is call as Impairment

An impairment (loss) is the amount by which the carrying amount (i.e. balance sheet value) of an asset or cash-generating unit exceeds its recoverable amount.

Impairment = Carrying value - Recoverable amount
Calculation Choices depreciation is generally computed using one of three methods:
The declining-balance method produces a decreasing annual depreciation expense over the useful life of the asset
The depreciation rate remains constant from year to year, but the book value to which the rate is applied declines each year.…...

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