Accounting – 7.1 Accounting principles | e-Consult

Calculation of Annual Depreciation:

Annual Depreciation = (Cost - Salvage Value) / Useful Life

Assuming a salvage value of £0:

Annual Depreciation = (£50,000 - £0) / 5 = £10,000

How Depreciation is Matched with Revenue:

The annual depreciation expense of £10,000 is recognized each year for the 5 years the machine is used. This means that each year, a portion of the machine's cost is allocated to the period in which the machine is generating revenue. For example, if the business earns £30,000 in revenue in year 1, £10,000 of that revenue is 'matched' with the £10,000 depreciation expense. This ensures that the profit reported in year 1 reflects the actual profitability of the business, considering the cost of using the machine to generate that revenue. This process continues for each of the 5 years.