IB Business Management Topic 3.4.4 Depreciation Methods Revision Notes (HL)

IB Business Management Topic 3.4.4 Depreciation Methods Revision Notes (HL) | RevisionDojo

Written by official IB examiners

Depreciation: Methods and Importance

Depreciation is the process of allocating the cost of a tangible asset over its useful life.
It represents the reduction in the asset’s value due to factors such as wear and tear, obsolescence, or usage over time.
Businesses use depreciation to account for asset costs in financial statements and for tax purposes.

Definition

Depreciation

The process of allocating the cost of a tangible asset over its useful life to account for wear and tear, obsolescence, or usage.

Causes of Depreciation

Wear and tear
1. As assets are used over time, gradual deterioration takes place.
2. This is particularly common in physical assets like machinery, vehicles, and equipment, which experience wear through friction, aging, and exposure to the environment.
3. As the asset is used, its efficiency declines, resulting in a decrease in its value.
Obsolescence
1. When an asset becomes outdated due to technological advancements or shifts in market demands.
2. Even if the asset is still functioning, it may lose value as newer, more efficient alternatives become available.

Example

Think of the old laptop or phone that you stopped using.

The Two Methods of Depreciation

1. Straight-Line Method

Definition

Straight Line Method

A depreciation method where an asset’s cost is reduced evenly over its useful life.

The straight-line method is one of the simplest and most widely used depreciation methods.
It allocates an equal amount of depreciation to an asset each year over its useful life.

How It Works

The assets' cost is spread evenly across its useful life.
The formula for calculating annual depreciation is:

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Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

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Lorem ipsum dolor sit amet, consectetur adipiscing elit. Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat.

Duis aute irure dolor in reprehenderit

Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur. Excepteur sint occaecat cupidatat non proident, sunt in culpa qui officia deserunt mollit anim id est laborum.

Note

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam quis nostrud exercitation.

Excepteur sint occaecat cupidatat non proident

Nemo enim ipsam voluptatem quia voluptas sit aspernatur aut odit aut fugit, sed quia consequuntur magni dolores eos qui ratione voluptatem sequi nesciunt. Neque porro quisquam est, qui dolorem ipsum quia dolor sit amet, consectetur, adipisci velit.

Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat.

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

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Depreciation: Methods and Importance

Depreciation is the process of allocating the cost of a tangible asset over its useful life.
It represents the reduction in the asset’s value due to factors such as wear and tear, obsolescence, or usage over time.
Businesses use depreciation to account for asset costs in financial statements and for tax purposes.

Definition

Depreciation

The process of allocating the cost of a tangible asset over its useful life to account for wear and tear, obsolescence, or usage.

Causes of Depreciation

Wear and tear
1. As assets are used over time, gradual deterioration takes place.
2. This is particularly common in physical assets like machinery, vehicles, and equipment, which experience wear through friction, aging, and exposure to the environment.
3. As the asset is used, its efficiency declines, resulting in a decrease in its value.
Obsolescence
1. When an asset becomes outdated due to technological advancements or shifts in market demands.
2. Even if the asset is still functioning, it may lose value as newer, more efficient alternatives become available.

Example

Think of the old laptop or phone that you stopped using.

The Two Methods of Depreciation

1. Straight-Line Method

Definition

Straight Line Method

A depreciation method where an asset’s cost is reduced evenly over its useful life.

The straight-line method is one of the simplest and most widely used depreciation methods.
It allocates an equal amount of depreciation to an asset each year over its useful life.

How It Works

The assets' cost is spread evenly across its useful life.
The formula for calculating annual depreciation is:

Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Note

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam quis nostrud exercitation.

Excepteur sint occaecat cupidatat non proident

Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

Unit 1: Introduction to Business Management - Core operational components and business functions6 subtopics

Unit 2: HR Management - Motivation, Structure, Hierarchy7 subtopics

Unit 3: Financial Management - Accounting, Ratio evaluation, Core Financial Documents9 subtopics

Unit 4: Marketing Management - The 7 P's, strategies and forecasting6 subtopics

Unit 5: Operations Management - Production Methods, Production planning and management9 subtopics

BM Toolkit - Core business frameworks and tools15 subtopics

IB Business Management 3.4.4 Depreciation Methods Notes

Unit 1: Introduction to Business Management - Core operational components and business functions6 subtopics

Unit 2: HR Management - Motivation, Structure, Hierarchy7 subtopics

Unit 3: Financial Management - Accounting, Ratio evaluation, Core Financial Documents9 subtopics

Unit 4: Marketing Management - The 7 P's, strategies and forecasting6 subtopics

Unit 5: Operations Management - Production Methods, Production planning and management9 subtopics

BM Toolkit - Core business frameworks and tools15 subtopics

Depreciation: Methods and Importance

Causes of Depreciation

The Two Methods of Depreciation

1. Straight-Line Method

How It Works

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account

Depreciation: Methods and Importance

Causes of Depreciation

The Two Methods of Depreciation

1. Straight-Line Method

How It Works

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account