Why assets are depreciated
An oven or a van is used for years, so its cost is shared over those years. Learn what depreciation is and what it is not.
Task 1Sharing the cost over the years of use4 questions
Ousegate Bakery buys an oven that it will use for eight years. An asset bought to use for more than one year is a non-current asset.
The cost of the oven is not all an expense of the year it was bought. It is shared over the years the oven helps to earn income. Each year's share is called depreciation.
- Cost
- what the business paid for the asset
- Useful life
- how long the business expects to use the asset
- Residual value
- what the business expects to sell the asset for at the end of its useful life
- Depreciable amount
- cost less residual value: the amount to be shared over the useful life
Inventory and money are not depreciated. Nor is land, because it does not wear out.
Task 2What depreciation is not4 questions