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  1. business-and-its-environment

    enterprise
    6 主题
  2. business-structure
    6 主题
  3. size-of-business
    3 主题
  4. business-objectives
    3 主题
  5. stakeholders-in-a-business
    2 主题
  6. external-influences-on-business
    12 主题
  7. business-strategy
    10 主题
  8. human-resource-management
    human-resource-management-hrm
    8 主题
  9. motivation
    4 主题
  10. management
    2 主题
  11. organisational-structure
    5 主题
  12. business-communication
    5 主题
  13. leadership
    2 主题
  14. human-resource-strategy
    3 主题
  15. marketing
    the-nature-of-marketing
    7 主题
  16. market-research
    3 主题
  17. the-marketing-mix
    6 主题
  18. marketing-analysis
    5 主题
  19. marketing-strategy
    3 主题
  20. operations-management
    the-nature-of-operations
    3 主题
  21. inventory-management
    2 主题
  22. capacity-utilisation-and-outsourcing
    1 主题
  23. location-and-scale
    2 主题
  24. quality-management
    1 主题
  25. operations-strategy
    4 主题
  26. finance-and-accounting
    business-finance
    2 主题
  27. sources-of-finance
    3 主题
  28. forecasting-and-managing-cash-flows
    1 主题
  29. costs
    4 主题
  30. budgets
    1 主题
  31. financial-statements
    4 主题
  32. analysing-published-accounts
    6 主题
  33. investment-appraisal
    2 主题
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Introduction to depreciation

  • Depreciation is an accounting technique which recognises that the value of fixed (non-current) assets falls over time

    • It reflects wear and tear, the reduction in an asset’s value as it ages or obsolescence

  • Depreciation aims to allocate the historic cost of the asset in a way that reflects its reduction in value over time

    • The current value of assets are recorded accurately in the statement of financial position

    • The loss in the value of an asset over an accounting period is recorded accurately in the statement of profit or loss

Reasons for calculating depreciation

1. Accurately calculate the business’s value

  • As assets depreciate, their current value is recorded in the balance sheet

    • Historic cost is an inaccurate measure as time goes by

    • Provides an accurate representation of capital employed

2. Plan effectively for the replacement of assets

  • Understanding the depreciation rate of assets helps a business to budget for future replacements

    • Avoid sudden financial strain

    • Schedule replacements to avoid disruption to production

3. Realistically reflects the costs of assets in financial statements

  • Depreciation is an expense recorded in the income statement

    • Reduces reported operating profit

    • Provides an accurate representation of a business’s financial performance

Net realisable value

  • Inventory should always be valued at its purchase price (also known as its historic cost) or, if it is lower, at its net realisable value

    • Accountants are encouraged to follow the principle of conservatism when compiling accounts

      • Over-valuing assets would lead to the net worth of a business being reported higher than it should be

      • It would also mean that insufficient expenses are recorded, leading to a higher than appropriate level of profit being recorded

  • The net realisable value is calculated using the formula

begin mathsize 16px style Net space realisable space value space equals space Anticipated space selling space price space minus space Selling space costs end style

Worked Example

Henne Organics Ltd is an online retailer of clothing. At the end of the year, a stocktake reveals two crates of unsold baby clothing. It intends to sell these items to a wholesale customer at an 80% discount.

Number of items

240

Purchase price

£3.40

Selling price

£16

[a] Calculate the historic cost of the baby clothing.

(1)

[b] Calculate the net realisable value of the baby clothing.

(2)

[c] Explain which value should be recorded as the stock’s value in the statement of financial position.

(3)

Step 1: Calculate the stock’s historic cost

begin mathsize 16px style equals space 240 space cross times space £ 3.40 equals space £ 816 end style [1]

Step 2: Calculate a reduction of 80% of the purchase price 

begin mathsize 16px style equals space 0.80 space cross times space £ 16 equals space £ 3.20 end style [1]

 Step 3: Calculate the net realisable value

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