FINANCIAL ACCOUNTING

GROUP 2 MEMBERS
NAME REG.NO
• BAGWAINE ISIMA VU-BCS-2307-0212-EVE
• SYLIVIA HALL VU-BBA-2307-0298-EVE
• JOAN NAMISANGO VU-BHR-2307-0197-EVE
• ATUHIRE DAPHINE VU-DHR-2307-0332-EVE
• VU-KALYANE JOY VU-BBA-2307-0227-EVE

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 DEPRECIATION
Depreciation refers to the systematic allocation of the cost of a tangible
asset over its useful life.
It helps businesses show how the value of these things goes down over
time due to various factors. This way, they can match the cost of these
items with the money they make from using them, which gives a more
accurate picture of their financial health

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 CAUSES OF DEPRECIATION
• Wear and Tear: Physical assets, such as machinery, equipment, and vehicles,
experience wear and tear as they are used over time. This usage leads to the
deterioration of the asset's physical condition, reducing its value.
• Usage or Mileage: Assets like vehicles and machinery often have their value
reduced based on the amount they are used or the distance they have traveled.
This is particularly relevant for assets where usage significantly impacts their
wear and tear.
• Technological Changes: Advancements in technology can make certain
production processes or equipment obsolete, leading to a decrease in the value
of assets used in those processes.

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 CONT’D
• Economic Factors: Economic factors such as changes in market demand, shifts in
industry trends, or changes in the business environment can affect the value of
assets. For example, a factory building in an area with declining demand for its
products may see a decrease in value
• Accidents or Damage: Unexpected events such as accidents, natural disasters, or
vandalism can cause physical damage to assets, leading to a decrease in their
value. Insurance claims may offset some of the losses in such cases.
• Deterioration from Use: Assets like tools or equipment used in industrial
processes may deteriorate from repeated use, even without significant wear and
tear, which can result in depreciation.

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 CONT’D
• Physical Decay: Over time, physical assets can deteriorate due to environmental
factors such as exposure to weather, humidity, or corrosive substances. This
decay can lead to a decrease in the asset's value.

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 STRAIGHT LINE METHOD

The straight-line method of depreciation is like spreading the cost of an asset

evenly over its useful life.
For example
A computer in your business was purchased at 1,000,000, assume the residual
value is 200,000.
Let P= original cost of machine
R= Residual value
n=number of useful years
D=Depreciation cost

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 CONT’D
Calculate the depreciation cost ; =( P-R)
= 1,000,000-200,000
=800,000
Annual depreciation charge = 800000/5yrs
=160000 per year
The computer will depreciate by 1600000 every year
NOTE:
In a scenario where the residual value is not given and the depreciation rate is given as
a percentage per annum lets 25%, we calculate the annual depreciation charge by
multiplying the original cost of the equipment by the percentage given i.e.
25%*Original cost.

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 REDUCING BALANCE METHOD
Here its viewed that as the life of an asset increases ,the cost of repair
and maintenance also increase.
Therefore a more equitable basis is to have a higher depreciation costs
in the early year when the machine is still new.
For insistence you have a computer that you bought for $1,000, and
you expect it to last for 3 years. Instead of spreading the cost evenly,
the reducing balance method lets you deduct a percentage of its
remaining value each year.
Imagine a depreciation rate of 25% for this computer.

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 CONT’D
Year 1:
Starting value: $1,000
Depreciation: 25% x $1,000 = $250
Value after depreciation: $1,000 - $250 = $750
Year 2:
Starting value: $750
Depreciation: 25% x $750 = $187.50
Value after depreciation: $750 - $187.50 = $562.50
Year 3:
Starting value: $562.50
Depreciation: 25% x $562.50 = $140.63
Value after depreciation: $562.50 - $140.63 = $421.87

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 HOW DEPRECIATION IS TREATED IN BOOKS OF ACCOUNTS
• Initial Recording: When a company buys something valuable, like a building or machinery, it
doesn't immediately subtract the full cost from its profits. Instead, it records the cost as an asset
on its balance sheet.
• Depreciation Expense: Over time, this asset gradually loses value due to wear and tear, becoming
less valuable. To reflect this, the company deducts a portion of the asset's cost each year as an
"expense" on its income statement. This expense is called "Depreciation Expense."
• Recording the Expense: The Company records this expense regularly, often on a monthly,
quarterly, or yearly basis. This practice reflects how the asset's value goes down over time.
• Impact on Financial Statements: Depreciation reduces the company's reported income on the
income statement, which is more accurate because it considers the cost of using the asset. It also
reduces the asset's value on the balance sheet, showing its decreasing worth.
• End of Useful Life: Once the asset's total depreciation equals its original cost, it's considered fully
depreciated. At this point, its value on the balance sheet is zero, and no more depreciation
expenses are recorded for that asset.

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 Illustration showing how depreciation is treated on the balance sheet.
Imagine you bought a motor van at an initial cost of 80000$ and it
depreciates at 4% per annum
Acc
cost Depreciatio NBV
$ n$ $
Non current
assets
motor van 80000 3200 76800

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 THANK YOU

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