Provision For Depreciation On Fixed Assets: Meaning And Calculation of Depreciation - SS1 Accounting Lesson Note

Provision of depreciation on fixed assets refers to the systematic allocation of the cost of a fixed asset over its useful life. In simpler terms, it is a way of spreading the cost of an asset over the time period that it will be used in the business, rather than recording the full cost of the asset in the year of purchase. The provision of depreciation on fixed assets is an important aspect of accounting because it helps to accurately reflect the cost of assets over their useful lives and provides a more accurate picture of a company's financial performance.

 

Depreciation can be calculated using several methods, but the straight-line method is the most common. The straight-line method assumes that the asset will lose its value evenly over its useful life, so the depreciation expense is calculated by dividing the cost of the asset by the number of years it will be used.

Calculating depreciation using the straight-line method:

Let's say a company purchases a machine for ₦1,000,000 with a useful life of 5 years. The depreciation expense for each year will be:

Depreciation expense per year = (Cost of the asset - Salvage value) / Useful life

The salvage value is the estimated value of the asset at the end of its useful life. Let's assume that the salvage value of the machine is ₦100,000.

Depreciation expense per year = (₦1,000,000 - ₦100,000) / 5 years

Depreciation expense per year = ₦180,000

So, the company will record a depreciation expense of ₦180,000 for each year of the machine's useful life. This reduces the book value of the machine each year, reflecting the fact that the machine is being used up over time.