Thanks for this video! I was struggling to understand this just from the textbook I'm using for my class. Videos help me learn, and yours was perfect. Short, simple, and clear.
Every time I ask about depreciation I get the same explanation. I have yet to have anyone explain WHY you would depreciate something rather than claim it as an EXPENSE. I would LOVE to see a video that actually uses NUMBERS explaining when depreciation is an advantage over claiming something as an expense (ie "Tom bought a $10,000 tool and wrote it off as an expense. Sally bought a $10,000 tool and depreciated it over 5 years. After 5 years, who saved more money on taxes?")
It's simple - it is based on the matching principle. The matching principle states that expenses should be matched to the revenue that they help earn. If you expense a capital asset on the day you buy it you would not be matching the expense to the revenue. For example, if an asset is used for 10 years and helps earn revenue for 10 years, then the expense should also be recorded over those 10 years. That's the whole reason for depreciation.
Great video,really helped me to understand what depreciation is.Can you please do a video on the effect and difference of a capital and bank account on a balance sheet and how the income and expenditures affects these two accounts.For example when someone buys something on credit from you as a business then your debitors will increase and your capital will also increase if im correct?If the customer didn't buy your goods on credit and they bought it with cash or debit then your bank will increase and not capital.I'm unclear on that,I don't understand the difference well enough.
in my book its written that 'depreciation is included in the expenses in income statement so that the profit is not overstated' how can the profit be overstated anyway? isnt depreciation just an estimate until the asset is sold, so why do we have to record it?and why dont we record the cost of a non current asset as an expense in the year of purchase? and why the cost of a noncurrent asset is spread over the years which we use it in? HELP please!!
Hi,sir can i need your help about this?? BALANCE SHEET ELEMENTS-ASSETS Depreciation Straight line method Gross amount 150,000.00 Life10ys Salvage value 50,000.00 How much is the annual depreciation expense? For 3rd years.how much is the net book value?
Hi Indika, Thanks for watching. Usually a van's life is measured in miles it can be driven. So for example, 200,000 miles would be the total life of the van. Check out How to Calculate Units of Production Depreciation video for more explanation! ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-X5to0rd8eXc.html
I also don't understand what the exact difference between a straight line method and a reducing balance method is of depreciation...I don't seem to get what the distinction between the who are.I know the straight line method is a fixed amount that is subtracted on a yearly basis but I don't get the reduced balance method.
Great question! Straight line is more “straight forward” if you will. You depreciate the asset by the same amount every period. Double declining balance method depreciates unevenly based on the carrying value of the asset. Depreciation is higher in earlier periods and over time depreciation declines since the carrying value of the asset also declines. More videos coming soon!
Depreciation is a good way to save money. Why buy a car that's more expensive than one that's already as at depreciated value? You get a better deal with the depreciated car than the more expensive car.
Hi Sakshi, thanks for watching. Land is very difficult to determine how much depreciation should be charged since it is part of the earth and not man made and is difficult to measure. Just remember, Land is not depreciated :)
