Depreciation and stakeholders
Depreciation
- Depreciation spreads the cost of a non-current asset over the years it is used, instead of all at once.
- Example: a £10,000 machine used 5 years loses £2,000 of value each year (straight-line).
- It lowers the asset's value on the balance sheet and counts as an expense, so profit isn't overstated.
Practice
Depreciation is:
Depreciation spreads a non-current asset's cost over its useful life, as an expense each year.
Practice
A 10,000 machine is depreciated over 5 years by the straight-line method. What is the yearly depreciation (in dollars)?
Straight-line = cost ÷ years = 10,000 ÷ 5 = 2,000 per year.
Who uses the statements
- owners/investors — check profit and return,
- lenders — check the firm can repay,
- managers — make decisions, set budgets,
- government — tax; suppliers — can the firm pay?
Practice
A lender mainly reads the financial statements to check whether the firm:
Lenders want to know the firm can repay with interest.
You've got it
Key idea
- depreciation spreads an asset's cost over its life (straight-line = equal amount each year)
- it lowers the asset value and is an expense, so profit isn't overstated
- stakeholders read the statements for different reasons (return, repayment, tax)