Depreciation & Adjustments

Straight-line and reducing-balance depreciation, accruals, prepayments and irrecoverable debts.

Adjustments make the accounts reflect the true position (the matching concept).

Depreciation

Straight-line:

\dfrac{\text{cost} - \text{residual value}}{\text{useful life}}

— equal each year.

Reducing balance: a fixed percentage of the remaining value — more in early years.

Worked example. Machine £20,000, residual £2,000, life 5 years: straight-line $= \dfrac{18{,}000}{5} = £3{,}600$ per year.

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Depreciation

Straight-line:

\dfrac{\text{cost} - \text{residual value}}{\text{useful life}}

— equal each year.

Reducing balance: a fixed percentage of the remaining value — more in early years.

Worked example. Machine £20,000, residual £2,000, life 5 years: straight-line

= \dfrac{18{,}000}{5} = £3{,}600

per year.