Purchasing and Financing 2024

We can distinguish between the following depreciation methods:
1. The Straight-Line Method
An asset is written of over a certain time and each period during that time is charged at
the same amount as another similar period.
For example: If a R9 000-00 computer is written of over three years, then it will be
depreciated at R3 000-00 per year.
2. Hourly
Some assets’ life expectancy is expressed in hours rather than years or months and
requires that a record be kept of the number of hours the asset is used during each
financial period.
For example: A machine is expected to last for 10 000 hours. The machine is used for 4000
hours in the first accounting cycle, but only for 3000 hours during the second accounting
cycle. It will be depreciated at R4 000-00 for the 1 st cycle and at R3 000-00 for the 2 nd .
3. Declining Balance
In using this method, a constant factor is applied to the reducing book value of the asset.
For example: An asset is depreciated at 25% of its value per year.
EXAMPLE:
Two partners, Peter and John, buy two machines at R50 000 each, that will be depreciated
over five years according to the straight-line method. They make a profit of R100 000 a
year before depreciation and share this among them.
o Their profit before depreciation will be R100 000
o Depreciation will be (2 x R50 000) / 5 = R20 000
o This amount will be indicated as an expense in their income statement
o Their profit after depreciation will be R100 000 – R20 000 = R80 000
o They will each receive R40 000 at the end of the year.
INDIVIDUAL ASSIGNMENT:
You buy 10 machines to start a business with a unit cost price of R75 000 and a life
expectancy of 3 years. Depreciation is calculated according to the straight-line method
and new machines are bought whenever there are sufficient liquid funds available.
Complete the following table:
Year Number of
machines
Depreciation
1
2
3
4
5
6
7
New
Machines
Machines
written off
Liquid Funds
33