1
00:00:00,210 --> 00:00:07,800
In this section, we will learn about depreciation and we will see how to calculate depreciation using

2
00:00:07,800 --> 00:00:08,970
three different methods.

3
00:00:10,320 --> 00:00:16,290
If you have seen a profit and loss statement, you would have noticed that there is often this expense

4
00:00:16,290 --> 00:00:20,880
item called depreciation, which is subtracted from the total revenue.

5
00:00:22,540 --> 00:00:31,860
The precision is basically an accounting process to compensate for the cost of asset that you have incurred

6
00:00:31,860 --> 00:00:34,740
initially over the life of the asset.

7
00:00:37,300 --> 00:00:44,890
So, for example, if you buy a new machinery for your plant, which costs you nearly 10000 thousand

8
00:00:44,890 --> 00:00:45,370
dollars.

9
00:00:46,580 --> 00:00:51,460
And after 10 years, that machinery is going to be of zero value.

10
00:00:52,610 --> 00:00:58,220
Then you can say that every year that particular machinery is losing some value.

11
00:00:59,200 --> 00:01:02,740
So that at the end of 10 years, it will be having non-value.

12
00:01:03,950 --> 00:01:08,480
To account for this decline in value of that particular asset.

13
00:01:09,570 --> 00:01:15,540
Over the bit of time we subtract the decline from our income statement.

14
00:01:17,580 --> 00:01:25,230
This is a non-cash expense, that is you do not have to pay out cash, the cash does not move out of

15
00:01:25,230 --> 00:01:26,100
your organization.

16
00:01:27,230 --> 00:01:33,710
However, because the value is declining and you want to show that decline in value, you are showing

17
00:01:33,710 --> 00:01:35,300
this as an expense.

18
00:01:37,490 --> 00:01:45,800
Now, when you have an asset which is losing value over time, what amount of value will lose in each

19
00:01:45,800 --> 00:01:46,110
year?

20
00:01:47,000 --> 00:01:51,380
Depends on which particular method of calculating depreciation you are using.

21
00:01:52,730 --> 00:01:58,190
There are several popular methods to calculate the precision we are covering the three most popular

22
00:01:58,190 --> 00:01:58,520
ones.

23
00:01:59,790 --> 00:02:04,090
The first is called Straight-line Method, which is the easiest one to implement.

24
00:02:04,830 --> 00:02:12,500
Then we will talk about double declining balance, which is a bit complicated, but it is very popular.

25
00:02:13,470 --> 00:02:19,470
And the third one, which we will discuss is some of your didit, which is also a bit complicated than

26
00:02:19,470 --> 00:02:22,650
the StreetLink method, but again, it is popular.

27
00:02:22,660 --> 00:02:23,700
So we'll be discussing.

28
00:02:25,740 --> 00:02:33,330
Tony Straight-line method of calculating the precision, we basically first see what is the value of

29
00:02:33,330 --> 00:02:36,470
asset that will be lost over the period of time.

30
00:02:37,680 --> 00:02:43,260
So initially, the value of the asset is the cost at which you buy that asset.

31
00:02:44,270 --> 00:02:51,590
And the salvage value that is the final value of that asset is the value at which you are able to sell

32
00:02:51,590 --> 00:02:54,170
it off after some amount of time.

33
00:02:55,180 --> 00:03:01,200
The difference between these two is the amount of value that is lost over the period of time.

34
00:03:03,430 --> 00:03:08,390
The second important barometer is what is the useful value of that asset?

35
00:03:09,040 --> 00:03:16,060
So if that asset will work well for the next five years, so the useful life of that asset is five years.

36
00:03:17,360 --> 00:03:23,450
If you are planning to use an asset for only three years, the useful life of that asset is three years.

37
00:03:25,950 --> 00:03:32,790
When you have these two values, one is the value lost all the time and the other is the useful life,

38
00:03:33,300 --> 00:03:39,050
you just have to divide these two values to get the depreciation you have to take for each year.

39
00:03:40,020 --> 00:03:47,460
For example, if you buy an asset for fifty thousand dollars and after five years, you sell it off

40
00:03:47,460 --> 00:03:48,630
for ten thousand dollars.

41
00:03:50,560 --> 00:03:59,590
So to value that asset lost in five years is 50000 minus 10 million, which comes out to 40000.

42
00:04:00,570 --> 00:04:08,580
Forty thousand is lost over five years, so each year we will take eight thousand dollars as the depreciation

43
00:04:08,580 --> 00:04:09,000
value.

44
00:04:11,730 --> 00:04:19,050
This 8000 will be taken for the next five years, so all the five year period, we will accommodate

45
00:04:19,260 --> 00:04:22,590
the 40000 loss of value in our income statement.

46
00:04:24,090 --> 00:04:32,070
So this is the simplest way of appreciating any asset, we simply take a straight line method where

47
00:04:32,190 --> 00:04:35,760
the asset is depreciating at a fixed value each year.