Let's dive deep into depreciation with real-life examples. This will help you to make a depreciation analysis of a particular business.
"As I am running a business called 'Glamour Beauty', I have purchased a new fancy hair styling chair for 5,000 Rs. This hair styling chair is a big part of my business, so let's call it an #asset."
The total value of a fancy chair is called a gross block. The 5000 rs would be #grossblock.
I have heard, that asset value keeps declining year on year. This decrease in value is called #depreciation. I decided that the chair will last for 5 years. So, each year, a portion of the chair's cost will be counted as an #expense ( non- cash expense). They calculated this yearly depreciation to be 1,000 (which is 5,000 divided by 5 years).
So 1000 would be #depreciationfortheyear.
"After three years, I thought about the depreciation of that chair again. I calculated that for 1 year it would be 1,000 Rs, so for 3 years it would be 3,000 Rs
so 3000 would be #accumulateddepreciation.
To find out the current value of the hair styling chair, subtract the accumulated depreciation from the gross block. This value is called #netblock. So, after three years, the net block would be:
Net block= gross block - accumulated depreciation
2000= 5000-3000
The #netblock is 2000 rs.
Now I will measure how efficiently I am using a hair styling chair to make money. That's called #assetturnover. It’s calculated by dividing total sales by the net block of the chair. For example, if Lily made 20,0000 rs in sales in the three year, her asset turnover would be:
Assets Turnover= sales/ net block= 200000/ 2000= 100
we have accumulated three years sales, The asset turnover ratio of 100 signifies that Salon is generating 100 rs in sales for every rupee invested in assets, reflecting excellent efficiency and strong utilization of its assets over the three years.
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Head / Senior Lead | Digital DTC | Partnerships Marketplaces | 10 years Women's Fashion & Lifestyle | Strategic Trading Optimisation | Business Development | Negotiation | Project Delivery | Ex Seasalt, Phase Eight
7moInteresting ! Rental/ hiring taken to the next level - looking forward to understanding the uptake of this and product/ brand mixes, and customer, especially as we move into wedding/ events summer season 🎉