Assets

An asset is an item that you acquire and that has a fixed value.

Appreciation of Assets

Something’s you buy can grow in value. When something grows in value after you bought it, it means that it appreciates or increases in value. The following assets usually increase in value after you have bought it:

Property – To work out how much an asset appreciates, we first determine what the growth rate for such an asset is, and then we continue with working out its appreciated value.

Example:

Bheki has just bought a house for R500000-00. He wants to know what this House will be worth in 5 years’ time.

First, he calls up a few local estate agents and asks by how many properties have increased in value in this particular suburb over the past 5 years.

He gets the following answers:

Agent 1: 10%

Agent 2: 20%

Agent 3: 15% Agent 4: 12% Agent 5: 9%

He works out the average:

(10+ 20+ 15+ 12+ 9)5 = 66 5

= 13.2%

Then he uses this average of 13,2% to work out the appreciation of his Property in one year:

R500000 x 13,2% = R66 000

Finally, he calculates this by multiplying R66000 by the number of years i.e. 5 years.

66 000 x 5 = R330 000

Appreciation of Property in 5 years = R500 000+ R330 000

= R830 000

Depreciation

Depreciation occurs more frequently than appreciation. Depreciation is anything that decreases in value. Good examples of things that depreciate are:

• motor cars
• cell phones
• computers
• machinery and equipment

At the end of each financial year, companies calculate the depreciation of an item.

There are two ways of calculating depreciation, namely:

• A fixed percentage of the original value (fixed method)
• A fixed percentage of the yearly depreciation amount.

Note: We only deal with the fixed instalment method.

Example:

Jack’s Hardware has to present an account of the value of their assets (i.e. vehicles, furniture, etc.) in the business each year. After many years of experience, Peter, the bookkeeper knows that after a few years of using these items, they are worth nothing. Eventually, he writes them off. (Writing off means that’ something is worthless to the business).

Jack’s Hardware has a bakkie which they use for deliveries. They paid R 120 000-00 for it. Usually they have to replace the bakkie every 5 years; otherwise it is more in the repairs hop than on the road. That means it has depreciated data rate of 20% per year (100%+5=20%)

To work out the depreciation over 5 years, we start with working it out for the first year:

Depreciation per year = 10/100x120000/1

= R12 000.00

Then we workout the depreciation over 5 years.

Value after 5 years = R120 000–(5x12000)

= R120 000– R60 000

= R60 000