11.1 Depreciation

Depreciation is the decline in value of an item over time. E.g. your car worth today may not be worth the same in a year time. The value, after taking account of depreciation, is called salvage value. There are two methods of depreciation; straight-line and declining balance. Straight-line depreciation reduces the value of item by constant amount every year.

Example 1

I bought a car for $25,000 which depreciates at 20% per year. What is its salvage value after 4 years and how much it depreciated?

Example 2

Continuing with same example of my car bought for $25,000 and depreciating at 20%, which one of the following charts best shows salvage value of this car over time?

You might find the following videos helpful related to this section:

3C Appreciation and Inflation (1 of 4)

by Mr Bodgers (click to view channel)

Explains what appreciation is.

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3C Appreciation and Inflation (2 of 4)

by Mr Bodgers (click to view channel)

Completes an example on appreciation.

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3C Appreciation and Inflation (3 of 4)

by Mr Bodgers (click to view channel)

Explains what inflation is.

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3C Appreciation and Inflation (4 of 4)

by Mr Bodgers (click to view channel)

Completes an example on inflation.

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3E Declining Balance Depreciation (1 of 5)

by Mr Bodgers (click to view channel)

Explains the difference between straight line and declining balance methods of depreciation.

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3E Declining Balance Depreciation (2 of 5)

by Mr Bodgers (click to view channel)

Introduces the formula used for declining balance depreciation and explains the terminology used.

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3E Declining Balance Depreciation (3 of 5)

by Mr Bodgers (click to view channel)

Completes an example where you calculate the salvage value of a car.

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3E Declining Balance Depreciation (4 of 5)

by Mr Bodgers (click to view channel)

Completes an example where you calculate the purchase price of a vehicle given the salvage value.

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3E Declining Balance Depreciation (5 of 5)

by Mr Bodgers (click to view channel)

Completes an example where you calculate the rate of depreciation as a percentage given the salvage value and purchase price.

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The following is the type of questions you can expect in exam:

– 11.1.1 Exam Question Type 1

Study notes of this section and other resources can be accessed here:

– 11.1.2 Study Notes & Resources