Depreciation and stakeholders
| English | Chinese | Pinyin |
|---|---|---|
| depreciation | 贬值 | biǎn zhí |
| non-current asset | 非流动资产 | fēi liú dòng zī chǎn |
| useful life | 使用寿命 | shǐ yòng shòu mìng |
| straight-line | 直线法 | zhí xiàn fǎ |
| residual value | 残值 | cán zhí |
| stakeholders | 利益相关者 | lì yì xiāng guān zhě |
Why a new van is worth less next year
- Buy a delivery van for 30,000 and in five years it's worth a fraction of that. The accounts must reflect this fall.
- That gradual loss of value is depreciation 贬值.
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Depreciation spreads the cost of a:
Depreciation applies to long-lived non-current assets.
What depreciation is
- Depreciation spreads the cost of a non-current asset 非流动资产 over its useful life 使用寿命.
- It matches the asset's cost to the years that benefit from it, rather than all in year one.
Straight-line 直线法 depreciation lowers the asset value by the same amount each year
An asset costs 50,000, has a residual value of 5,000 and a life of 9 years. What is the annual straight-line depreciation?
(50,000 − 5,000) ÷ 9 = 45,000 ÷ 9 = 5,000.
The depreciation method charging an equal amount each year is the ______-line method.
Straight-line = (cost − residual) ÷ life.
The straight-line method
- Straight-line depreciation = (cost − residual value 残值) ÷ useful life.
- It charges the same amount each year.
Worked example. A machine costs 20,000, has a residual value of 2,000 and a useful life of 6 years. Annual depreciation = (20,000 − 2,000) ÷ 6 = 3,000 per year.
Depreciation reduces profit but is not a cash outflow in that year.
The cash left when the asset was bought; depreciation is a non-cash charge.
A bank deciding whether to lend will look at the accounts mainly to judge:
Lenders assess repayment ability and gearing.
Stakeholders 利益相关者 and the accounts
- Different stakeholders read the accounts for different reasons:
- Shareholders check profit; lenders check ability to repay; managers plan; employees judge security; government assesses tax.
Depreciation is a cost, not a cash outflow. It reduces profit on the income statement, but no cash actually leaves the business that year — the cash went out when the asset was bought.
You've got it
- depreciation spreads a non-current asset's cost over its useful life
- straight-line = (cost − residual value) ÷ useful life — equal each year
- many stakeholders read the accounts for different purposes; depreciation is a non-cash cost