The meaning of depreciation and why it occurs


1.What is depreciation and why do we account for it?

Depreciation is the continous monthly devaluing of movable assets, allowed by SARS to enable businesses to calculate real values on such assets.

All movable assets depreciate in value over time, as they are used in day to day business and

vehicles in particular lose value as they aquire Kms and get older

The depreciation process allows businesses to allow for replacement of such movable assets as

well as to enable such businesses to sell off such assets when new ones are


2.Do two vehicles of the same make with similar features deprectiate at the same rate.

Why is this so?

Vehicles of the same make, could depreciate at different rates due to different applications eg a

driver of one vehicle may do higher mileage than the next.

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The condition of the vehicle is also influenced by its application (what it is used for) as well as

driving styles service intervals, accidents etc.

3.What factors, exept the make of the vehicle, influence the price of a second-hand car?

Used vehicle values are influenced by a large variety of factors,of which supply and demand most

certainly have the biggest influence.

Other factors which are important to note are:


General condition of the vehicle


Cost of repairs neccesary to market the used vehicle effectively, eg Tyre wear, etc.




Age or Year model

4. If a newer model of a car comes out, how does this affect the price of the previous model and the

second-hand market?

A new model does not neccesarily influence the price of a used model negatively .This process is

driven exclusively by supply and demand.

There are many instances of used vehicles actually appreciating after a new model is launched.

Major conrtibuting factors to such scenarios would be the price, availability, and popularity of the

newly launched model

as opposed to its pre The new model may not be as popular due do whatever reason

( price,reliabilty, features etc)

A good example of this is the Toyota Landcruizer Pickup ( these vehicles actually increase in value

because of the ever increasing price of newer models)

I many instances the opposite is true. Newly launched model genarally offer more features as well

as well as modernised styling and shapes and the increased

demand may then influenceowners of previous models to buy, causing an over supply on used

models, thus influencing valuse of used vehicles negatively.

5.How does VAT work in the sale of a second-hand car?

Input VAT is claimed by the dealer on the prurchase price(trade-in price) at the set rate, effectivley

devaluing the vehicle by 14% at the current VAT rate.

A profit margin is then added to the adjusted cost price of the vehicle and VAT added to the sum

of the adjusted cost price plus the profit margin( retail price)

VAT is therefore effectively charged only on the realised profit of a used vehicle

6.Are there any guidelines when pricing a second-hand car?

The most commonly used guidline is a used value booklet issued by Mead and Mcgrouther, listing

used vehicle values by manufacturer per model derivative.

These guidelines are compliled by way of a complex reporting system aquired by the suppliers of

the booklet from information gathered monthly from a wide

spectrum of dealers who report to Mead and Mc Grouther on the follwing issues.

1. Higest price realised on each specific make and model.

2. lowest price realised on each specific make and model

3. Condition of the vehicles reported ,categorised into exellent, good, fair etc

4 Mileage of the vehicles reported

The guidelines in the booklet list both the suggested trade in price as well as the suggested retail


These prices, used in conjunction with a formulated graph in the back of the booklet, specifying

the percentage allowed for addition/deduction as per the

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condition of the vehicle and its mileage determines the guideline used by the dealer to formulate a


Other factors which may influence this value are repairs neccesary to market the vehicle effectivley

as stipulated under question 3:

7.What can a business or person do to influence the price that they could get for a trade-in?

1. Ensure that your car is clean and free of defects

2 Service regularly with a accredited service repair centre( perferably with a franchise dealer)

3. Ensure that the service manual is up to date and in the vehicle for inspection

4. Keep detailed copies of all interventions/repairs and service invoices as a history file for prior

inspection when trading the vehicle

8.Is there a particular time of the year that it is better to buy or sell or trade-an a vehicle?

Historically manufacturers tend to lauch new models at year end. In the past, it was possible to

register such newly lauched models in the following year provided

the vehicle was registered within 21 days of receipt of the vehicle as per the 21 day temporay

permit issued. However the new Natis systemdoes not allow for this

and it is therefore pointless purchasing a vehicle before year end.

It would also be wise to take price hikes, historically scheduled by manufactureres for close on

year end, into consideration in conjunction with the year of regiistration would not neccesarlily be better to wait a month or so to enable you to buy a car registerd in

the following year if price hikes eliminate the saving you may have had

when trading in your vehicle

Cheaper vehicles tend to fetch better prices during Jan through the first part of Feb as demand is

increased by students, and utility type vehicles tend to fetch better

prices at the start of the holiday seasons

1.What is depreciation and why do we account for it?

The older the vehicle the less the trade in

2.Do two vehicles of the same make with similar features depreciate at the same rate?

Why is this so?

The first year both cars will depreciate approx 37%.  It normally

depreciates between 27-30%, obviously the more expensive the vehicle, the

more depreciation in rand value

3.What factors, except the make of the vehicle, influence the price of a second-hand car?

Vehicle must be neat and tidy; tires in good condition, not involved

in an accident, upholstery in good condition, the lower the mileage the

better, no chip marks on windscreen, rust free

4. If a newer model of a car comes out, how does this affect the price of the previous model and the

Second-hand market?

Normally if a new model comes out, it comes with an increase in

price, to get rid of previous models ASAP; all depends on the financial

position of customer, if a smart facelift of the new model, customer will

rather buy new one

5.How does VAT work in the sale of a second-hand car?

Exactly the same for new cars, VAT is payable for both

6.Are there any guidelines when pricing a second-hand car?

One has to follow the guidelines in the Mead & McGrouther; following

taken into consideration:  low mileage, condition, tires, rust, accident


7.What can a business or person do to influence the price that they could get for a trade-in?

Same as question 3

8.Is there a particular time of the year that it is better to buy or sell or trade-an a vehicle?

If you trade in a vehicle in Nov/Dec you will get more, but on the

other hand if you buy in January, car will be registered in the New Year.

Section 1

1.What is depreciation and why do we account for it?

Depreciation is the permanent and continuing diminution in the quality, quantity or value of an asset. Depreciation Accounting deals with the allocation of costs of fixed assets over their useful lives.

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For example, when we buy fixed asset like factory machinery, this is merely an advance payment of which we expect that this fixed asset is able to enhance or earn certain earnings for the business. Over a period of time, the fixed asset we buy will become valueless or unable to generate the necessary earnings. To reflect this continuing diminution in the value of the factory machinery, we need to apply depreciation accounting.

The reasons for depreciation are: wear and tear, obsolescence, falls in market price, effluxion of time, physical factors, and inadequacy.

Reasons why we account for depreciation are: to ascertain the net earnings/profit for an accounting period, depreciation needs to be computed. Depreciation normally constitutes a major part of the expenses of the business. As the business buys fixed assets, it expects the fixed assets over the useful lives are able to generate the necessary revenues for its business. Whilst revenues being earned and if there is no allocation of depreciation cost to match this revenue, income will then be overstated. Also, fixed assets in the Balance Sheet will be overstated if depreciation is not provided for. Only that part of the costs of fixed assets that have not expired should be reflected in the Balance sheet otherwise the financial statement would not reflect a true and fair view. And if depreciation is not provided for and assuming if the whole profits were withdrawn during the life of the asset, additional capital would have to be raised when it is time to replace the fixed assets. By charging depreciation against profits, the ultimate residual profit available for distribution is lowered and that funds are retained in the business for future replacement

2.Look in a newspaper for two different makes of new cars (e.g. A Hyundai and a Mercedes) of your choice and note their prices. Find the same two makes of cars with similar features for sale second-hand ensuring that they both are as old as the other (e.g. 2 years old). Calculate how much each make of car has deprecated percentage wise over the time period. Did both makes depreciate by the same percentage? Explain why do you think this is so?

The depreciation of a vehicle mostly depends on the application of it by the driver. Thus, two vehicles of the same make and model may depreciate a different rate. A vehicle will normally depreciate at a rate of 27-30% per year.

3.Besides models, describe other factors the influence the price of a second-hand car.

Second hand car price must be based upon the marketability of the car, which you wish to sell. If make and model of your car is new, then definitely you may like to sell it as soon as possible.

Other factors which may influence the price of a second-hand car are: mileage, condition, special features of the car, who has been driving the car, petrol consumption and has any major cosmetic or mechanical improvements been made to the car lately.

4.If a new model of a particular car comes out, how does that affect the price of the previous model and what effect does this have on the second-hand market?

When a newer model of a car comes out, the price of the previous model will be cheaper. This is due to the fact that the older car model is out dated. Its technology is less advanced than the newer models.

On the other hand, a vehicle may be popular and thus the price will continue to increase.

5.How does VAT work in the sale of a second-hand car?

There are two ways in which motor dealers handle VAT on used vehicles. Some charge VAT only on the profit they make on the sale of the car. This is known as the second-hand margin scheme, used by most car dealers.

Alternatively, they can charge VAT on the total transaction cost - that is the second-hand selling price achieved. It depends on how they choose to keep their records.

The second-hand margin scheme requires more paperwork from the dealer. He must, for example, keep the relevant stock books, which include details such as the car's engine number.

Each method of charging VAT is legal, and HMRC is concerned only that the dealer tells them which scheme he is using.

There is no obligation for the dealer to tell the customer at the outset which method of charging VAT will be used. Nor is there a legal right for the customer to know, or be told, how much of the price comprises VAT.

Yet as VAT on the full purchase price is likely to be rather more than VAT on the dealer's profit on the transaction, it seems to me worth asking which method of charging VAT a car dealer uses before deciding to buy.

6.Are there guidelines for all dealers when pricing second-hand cars?

Pricing of used cars can be affected by geography: for example, a sedan will make more sence in a city than in an arid area where it is difficult to drive . Similarly, pickups are often more in demand in rural than urban settings. Condition - Is the car in excellent, good or fair condition - has a major impact on pricing. Condition is based on appearances, vehicle history, mechanical condition and mileage. There is much subjectivity in how the condition of a car is evaluated.

7.List some things a person or business can do to influence the price that they could get for a trade-in?

When it comes to getting value for your trade-in, one should always do ones homework.The key to doing well in a transaction with a dealer is to be knowledgeable.Before heading to the car lot, research your car online. One should understand the market as well.

Be realistic about what you're selling, look at your mileage and how well the car has been kept. All these things come into play when valuing your car. Cleaning your car may slightly increase your cars book value.

Regardless of what the auto pricing guides say, it's up to the dealer to accept your trade-in. So, it's important to look at your car or truck from the dealer's point of view.One of the dealership's major concerns is determining how quickly your trade-in is likely to sell to another buyer.

When trading-in a car, a dealer looks at the vehicle, walks around it, check it to see if it's had paint work and check to see if any damage has been done to it and take the vehicle for a drive. They will check to see what repairs the vehicle will need to get up to standard or they have to decide if it would cost too much to have the repairs done. They will also be aware of what a car is currently selling for.

A smaller car trade-in that are in great condition fare better right now.If you have a clean, used car, with no accidents and no damages, and if it's a four-cylinder or six-cylinder engine, it will bring a fair price. Of course, it's up to the consumer to research in advance what that fair price could be.

If you're trading in a newer-model used car, then surprisingly, it could work against you. If it's a year or less, the car could still be competing with new autos of the same make and model. In addition, the manufacturer may be offering special incentives for the new car.

Separate the trade-in and new car transactions.There are many variables involved in purchasing a new (or new-to-you) car, including the finance rate, new car price and down payment amount. Make sure the price you get for your trade is not affected by any of them.

The first dealer you meet, keep your options open when negotiating a trade in, do not limit yourself to just one dealer.

Section 2

1.What is an asset register and what does it include?

The asset register is a tool, which helps you to stay in control of your assets in a simple and efficient manner. Here, you register all the details for each individual asset: identification number of asset, description of asset, on which date it was bought, cost, how it was financed, rate and method of depreciation, annual depreciation for each year of its life, current book value, date of disposal and proceeds from disposal.

2.How does a business decide what vehicle to buy-model, make, color, ect? On what are these decisions based?

Obviously finances will be the biggest factor when deciding what vehicle to purchase. The vehicle must be affordable, fuel efficient and easily maintained to reduce the running cost. It will also have to an intended purpose. For example, an electrician requires a pick-up truck to be able to transport his equipment; a sedan will be of no use to him at all. A company like Henning Crushers will buy large quality truck to transport bricks and other raw materials.

3.What method and rate of depreciation does your business use and why?

A business like Henning crusher depreciates its vehicles at a rate of 15% a year on the cost price method. This is due to tax purposes and the fact that a vehicle will depreciate very quickly.

4.How does a business decide when to sell or trade a vehicle?

What shape is your used car in? If your car is in good shape, you might consider selling it yourself. If you need to make repairs, though, you need to ponder how much you're going to invest in the repairs. The truth is you might not recoup the entire investment. So, weigh the possible cost of repairs against the potential added value.

Regardless if you sell or trade in your used car, it has to be in good shape. Follow my step-by-step instructions for selling or trading in your used car.

A lot of research is necessary whether you sell or trade in your used car. Trading your used car in requires going to the top three valuation sites:,, and and establishing a price you will realistically get for your used car if you trade it in.

Selling your car requires the same step, but it also requires you researching the best methods for selling your used car. You also have to research how to make the transfer when the time comes as well as research what others in your area are trying to sell their used cars for.

Do you like paperwork? When you sell your used car to a dealer, the dealership has staff to handle the paperwork for you. Basically, you drop off the keys and they present you with a neat and tidy package of papers to sign. Your plates either get transferred or you get a new registration depending on your state's practices.

When you sell your used car to a private buyer, you have to do all the paperwork yourself. You have to make sure the transaction is handled properly and the title transfer is done correctly. Do it wrong and you could continue to be the owner for tax and liabilities of the vehicle. Plus, you have to go to your motor vehicle office and effect all the necessary paperwork changes.

What is your time worth to you?

5.Why is it important to review the value of a vehicle from the point of view of insuring them?

Vehicle insurance (also known as auto insurance, car insurance, or motor insurance) is insurance purchased for cars, trucks, and other vehicles. Its primary use is to provide protection against losses incurred as a result of traffic accidents and against liability that could be incurred in an accident.

According to the insurance policy, a asset must be insured as close to its true value as possible. If the vehicle were to be insured for a higher value than it is truly worth and a accident or theft takes place, the insurance company will pay ou less than for what the vehicle is insured. Thus you may make a loss. This situation is known as over-insured.

While being under-insured, will mean that you will be paid out less than the vehicles true value in case of a ccident or theft.

6.What does the business do to try to maintain the value of its vehicles?

A vehicle maintenance log is a journal of all maintenance performed on a particular vehicle. Each entry includes a date, mileage as of that day, details about the type of work done, and who performed the service. The maintenance log might also include receipts and a schedule for further maintenance.

One of the most common reasons to keep a vehicle maintenance log is for a leased car to show that you have honored your end of the lease contract by keeping up with standard maintenance on the vehicle at, or prior to, the manufacturer's suggested time intervals. A vehicle maintenance log will clearly show oil changes, tire rotations, brake inspections or replacements and so on. At the time you return your vehicle from lease, you may be asked to prove that the car was maintained properly. The vehicle maintenance log will come in very handy.

Another common reason to keep a vehicle maintenance log is when using a company car. Often it is required in this case for tax purposes. Everything related to the car, short of using it for pleasure, is a write-off for the company. This includes gasoline and all maintenance. Therefore strict records are required. A vehicle maintenance log works perfectly.

Similarly, if using your private car for company business a portion of gasoline, mileage and maintenance might be tax deductible. Often, businesses will reimburse you instead, but in either case a vehicle maintenance log is required. Whenever the car is used for business purposes, starting and ending mileage must be noted and dated in the log.

However, a vehicle maintenance log is a good idea for anyone. It's easy to forget how long it's been since certain maintenance has been performed without a record. Again, a well maintained car is a safer car and can lead to saved money on repairs down the road. Also, proof that you have maintained your vehicle properly is very important to the next buyer and actually increases the value of the vehicle. It exudes an air of care and meticulousness, and a car that has been maintained is less likely to have or develop serious problems. Finally, when you do have to take the car in for repairs, it's handy for the technician to see the work that has already been done.

There are many ways to create a vehicle maintenance log either using a simple blank logbook or a spreadsheet in a program such as Excel. However there are also software programs like Automotive Wolf by Lonewolf Software that will not only keep track of your maintenance but will calculate your gas mileage for you and much more. Automotive Wolf also has an attractive "vehicle interface" that uses gauges to let you know when certain maintenance is due. This software and programs like it are modestly priced and free to try if downloaded off the Internet. If using software, it's a good idea to keep a simple spiral notepad in your glove compartment to jot down mileage and details that you can later enter into the software or spreadsheet. Some software-based vehicle maintenance logs are designed to run on Portable Digital Assistants (PDAs) so you can enter your information right from the drivers seat!

Whether you take the simple route of making your own log, or a fancier alternative, keeping a vehicle maintenance log is a smart move that can only work to your advantage!

7.Does the business usually make a profit or a loss on sales of vehicles? Why?

A loss. This is due to factors like depreciation, usage and the wear and tear of a vehicle of a time period. Also, newer model and technology are constantly being released into the market.

8.What internal control processes does your business have to manage its tangible assets?

Processes effected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations; Reliability of financial reporting ; and Compliance with applicable laws and regulations.

Accurate and complete historical accounting and financial statement information

Performance management processes

Strategic planning

Budget and forecast mechanism

- Capital expenditure analysis, budgets, and management

- Cash flow management

Established priorities that align operations

- Coordinated functional activities

- Infrastructure that facilitates activity and doesn't constrain operations

Business risk analysis and management programs

Accurate, defensible valuations of tangible assets play a critical role in many business situations, ranging from the mundane to the esoteric. Real and personal property valuations are important for tax and financial reporting, asset monitoring, property insurance, ad valorem taxes and replacement budgeting. At the other end of the spectrum, valuation of assets can be an indispensable tool in establishing prices, justifying positions to stockholders and satisfying governmental concerns in the course of corporate mergers, acquisitions, refinancing and restructuring.


Asset- In business an accounting, assets are everything of value that is owned by a person or company. Any property or object of value that one possesses, usually considered as applicable to the payment of one's debts is considered an asset. Simplistically stated, assets are things of value that can be readily converted into cash. Examples of assets are: cash, pre-paid expences, vehicles, machinery, land and buildings.

Fixed assets- Also referred to as PPE (property, plant, and equipment), these are purchased for continued and long-term use in earning profit in a business. This group includes land, buildings, machinery, furniture, tools, and certain wasting resources e.g., timberland and minerals. They are written off against profits over their anticipated life by charging depreciation expenses (with exception of land). Accumulated depreciation is shown in the face of the balance sheet or in the notes.

Current assets- Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle. These assets are continually turned over in the course of a business during normal business activity. Examples of current assets are: cash, pre-paid expenses,debtors and money in the bank.

Depreciation- In simple words we can say that depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay or other such factors.

Straight-line depreciation-Straight-line depreciation is the simplest and most-often-used technique, in which the company estimates the salvage value of the asset at the end of the period during which it will be used to generate revenues (useful life) and will expense a portion of original cost in equal increments over that period. The salvage value is an estimate of the value of the asset at the time it will be sold or disposed of; it may be zero or even negative. Salvage value is scrap value, by another name.

Declining-Balance Method-Depreciation methods that provide for a higher depreciation charge in the first year of an asset's life and gradually decreasing charges in subsequent years are called accelerated depreciation methods. This may be a more realistic reflection of an asset's actual expected benefit from the use of the asset: many assets are most useful when they are new.

Value added tax (VAT)- is a consumption tax levied on value added. In South Africa VAT is 14%. While in Namibia VAT is 15%.

Section 3

When opening a new medium-sized business, a vehicle is a very useful asset to get the business off the ground. To be successful, the business must be aware of how it plans to get its vehicles, how to manage the depreciation of the vehicles, selling the vehicles, maintaining the vehicles and also controlling the vehicles.

Acquisition of vehicles: a business must take several factors into consideration when buying new vehicles. Firstly, a business can buy a vehicle first or second hand. More factors like the color of the vehicle, the purpose it has to serve and the cost of the vehicle have to be considered as well.

Depreciation of vehicles: Depreciation is the permanent and continuing diminution in the quality, quantity or value of an asset. Depreciation Accounting deals with the allocation of costs of fixed assets over their useful lives. It is impossible to avoid depreciation. The business must be prepared to adjust this expense.