Depreciation on Fixed Assets

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Depreciation of Fixed Assets
Depreciation
A business may acquire fixed assets such as land, buildings, machinery, office equipment, delivery equipment and natural resources (e.g. a piece if mining land)to help in the process of its operations to earn revenue in order to make a profit. Such assets, by their very nature, provide benefits to the business for more than one financial year or period. In fact, when a business buys a fixed asset at a certain cost (say $10,000), it is actually buying a bundle of service benefits that will be provided by that fixed asset over a period of time in the future (say 10 years).
Take, for example, when a wholesaler buys a delivery van, it is in effect buying transporting services for his goods that
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Calculation of Depreciation
It is very difficult to come to the 'true ' value of the service benefits provided by a fixed asset that is used up or consumed during an accounting period. Depreciation is at best an estimate, depending on which method we use. It is only after the fixed asset is sold off that we can know for certain how much depreciation should actually have been.
Depreciation can be calculated by one of the following methods: 1. The Straight Line or Fixed Instalment method; 2. The Reducing Balance or Diminishing Balance method; and 3. The Revaluation method.
Straight Line or Fixed Instalment Method
By this method, the fixed asset is assumed to depreciate at equal amount for every year of its expected lifetime. The cost of the asset is spread evenly over its lifetime.
Reducing Balance or Diminishing Balance Method
By this method, the asset is supposed to depreciate at a fixed percentage of its depreciated value (or book value) at the beginning of each year. The amount set aside for depreciation will diminish with every successive period since the value of the asset at the beginning of every successive period tends to diminish.
The main advantage of this method is that in the Profit and Loss Account, the amount of overall expenses charged for the use of a fixed asset would be more or less constant throughout the asset 's lifetime. This is because depreciation is only one of the expenses involved. Other
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