Depreciation, book value.
Brief description of the video content.
In this video, the second part, I have included the terminology concerning depreciation, useful life, salvage value, book value.
I quote, depreciation expense is an allocated portion of the cost of a company’s fixed assets.
We have already explained the fixed assets that are appropriate for the accounting period Indicated in the company statement. The income statement is prepared by the financial department.
If a company had paid $2400,000 for its office building excluding land. and the building has an estimated useful life of 40 years, each monthly income statement will report a straight-line depreciation expense of $5000.That was a part of the video. The video has a subtitle and a closed caption in English.
You can click on any picture to enlarge then press the small arrow at the right to review all the other images as a slide show.
What is the depreciation expense and salvage value?
Depreciation expense is an allocated portion of the cost of a company’s fixed assets. We have already explained the fixed assets that are appropriate for the accounting period Indicated in the company statement.
The income statement is prepared by the financial department. If a company had paid $2400,000 for its office building excluding land and the building has an estimated useful life of 40 years, each monthly income statement will report a straight-line depreciation expense of $5000 for 480 months, which is the value of 2,400,000/480=$5000.
In general, it is the value of a piece of equipment or other property after it has been functionally rendered useless for the purpose for which it was intended. I quote, that salvage value is the estimated value that the owner is paid when the item is sold at the end of its useful life.
The salvage value is used to determine annual depreciation in the accounting records, and the salvage value is used to calculate depreciation expenses on a tax return.
In accounting, salvage value is an estimated amount that is expected to be received at the end of a plant asset‘s useful life. Salvage value is sometimes referred to as disposal value, residual value, terminal value, or scrap value.
The estimated salvage value is deducted from the cost of the asset in order to determine the total amount of depreciation expense that will be reported during the asset’s useful life.
Accountants and income tax regulations often assume that plant assets will have no salvage value. This will result in an asset’s entire cost being depreciated during the years that the asset is used in the business.
What is a useful life?
Useful life is an estimate of the average number of years an asset is considered Usable before this value is fully depreciated.
Tabulated values of useful life.
I have attached a list quoted from an internet resource for the useful life of the different assets, for example, machinery and equipment useful lives =5 years. The relative link is shown in the slide.
What does per Annum mean?
Per annum means, per Yearly or annually. For example, if the business charges the customer 1.50% per month on any unpaid balance, the per annum rate is 18%., which is 1.50/ month*12=18%.
Example of Per Annum
An example involves a supplier offering a credit customer an early-payment discount of 2% for paying an invoice in 10 days instead of paying the full amount in 30 days. In this example, the supplier is giving up 2% of the invoice amount in order to be paid 20 days early.
To compute the rate per annum we restate the amounts by multiplying both the “2%” and the “20 days” by 18 (in order to get close to the 365 days in a year). The result is a per annum rate of approximately 36%.
Another example involves a business charging its customers 1.5% per month on any past balance. The monthly rate of 1.5% can be converted to 18% per annum by multiplying the 1.5% times 12 months in a year.
What is the book value?
The book value of an asset is equal to the carrying value on the balance sheet and is calculated by netting the asset against its accumulated depreciation.
The asset value is decreased per year due to the depreciation, its value is recorded as the book value.
Book value is also the net asset value of a company calculated as total assets minus intangible assets, patent, goodwill, and liability.
Another form of intangible assets, intangible assets, which are assets that lack physical existence.
This is a good link -Engineering Economy. Applying Theory to Practice.
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