As you all know, it is because of time. Will you be young forever? I don’t think so unless you are immortal. Humans ageing every minute of their life. Same goes to non-living things. They grew older and older through time.
So…Assets. We have current and non-current assets. The one that we will focus on is the non-current assets. This is because the business use these assets to generate income and in their operations. Still remember what are the things in the non-current assets? They are land and building, pant and machinery, fixtures and fittings, motor vehicles and office equipment. All these things the business use to generate income, which they owned, possess and control.
Simple example for depreciation, let say, you bought a mobile phone last January 2017 for RM3,000 and then you want to sell it to your friend in December 2017. How much you think you can sell it? Can you sell it for RM3,000 same as you purchased the mobile phone a year ago? Well, if you succeed to sell it for the same price you bought it at RM3,000, congratulations! Maybe that person either crazy or want to win your heart or maybe that person is on drugs! If you ask me, how much would I take it, of course, I would happy to purchase it from you for RM800-RM1,000.
Because the phone is considered a second hand item. It is already being used. Probably it might fell down from a cliff or something and not to mention, the owner of the phone always bring the phone to the toilet for whatever reasons…
The difference between the original price (cost price) and the current value is what we called depreciation. Original cost is RM3,000, the secondhand value is RM1,000. The difference is RM2,000 is depreciation. That is the cost of using the asset.
That is the simplest explanation for depreciation.
So tune in for the next episode. Later! Chiow!