DEPRECIATION
10 May 2016 By PDSNETThe process of charging the value of a fixed asset against the company's profits at the same rate at which it is expected to wear out or become obsolete. It would not be reasonable to charge the full value of a motor vehicle against the profits of one year when the vehicle is expected to last for 5 years. Therefore a system of charging 20% of the purchase price per annum could be employed (this is called the straight-line method of depreciation). Depreciation is sometimes applied on a "reducing balance method" where the percentage is charged against the balance remaining after the depreciation of previous periods. For example, if an asset cost R10 000 and was to be depreciated at 20%, the first year would be based on 20% of R10 000, but the second year would be 20% of the remaining book value of the asset (R8 000) and so on. Different assets may be depreciated at different rates using the straight-line or reducing balance method for tax purposes. Depreciation also helps to build up cash in the business to replace the asset when it is worn out.
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