Depreciation methods

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Silent Prince

Depreciation:-Gradual decrease in the value of an asset

is known as depreciation.It has two types:-1- Internal depreciation.2- External depreciation.

Formula of Depreciation

Depreciation =Cost of Asset

No of year

Internal Depreciation:-Depreciation which occurs for certain

inherent normal causes, is known as internal depreciation. Such as wear and tear and depletion.

External Depreciation:-Depreciation caused by some external

reasons is called external depreciation. Such as obsolescence, efflux of time and accident.

Causes of depreciation• Wear and Tear• Obsolescence

Wear and Tear:-The change in the shape of an asset due to

use in the business is known as wear and tear.

Obsolescence:-The decrease in the value of an asset due to

new inventories, change in habit and taste of people, improvement and change in technology and fashion is known as obsolescence.

Methods of depreciation

• Uniform charge method• Diminishing method Uniform charge method:-

In this case method of depreciation is charged on uniform basses year after year.

Types of Uniform Charge method

• Straight line method• Depletion method• Machine rate method

Straight Line Method Of Depreciation

Under this method depreciation of an asset will be equal in each accounting year, it is also known as straight line method.

Formula of straight line method

Depreciation= Original cost of an asset- scrap value

Estimated life

For percentage of depreciation:-

Depreciation × Depreciation × 100

Original asset Depreciation × 100

Original asset

Date Assets Depreciation

2000 10000rs (10000×25)/100=2500

Balance of C/D 7500

10000 10000

2001 7500rs (10000×25)/100=2500

Balance of C/D 5000

7500 7500

2002 5000rs (10000×25)/100=2500

Balance of C/D 2500

5000 5000

2003 2500rs (10000×25)/100=2500

Balance of C/D 0

2500 2500

Example of straight line method

Assets-Depreciation10000-2500=7500


Depletion method or Production output method:-

Decrease in the value of wasting asset is called depletion.

Wasting Assets:-Assets whose value gradually reduces on account

of use and finally exhausts completely are called wasting assets, e.g. mine, forest, machinery etc

Detail:-In this method the charge of depreciation

In respect of use of an asset will be based on the following factors.

i.Total amount paid.ii.Total estimated quality of output available.

Natural Resources:Cost Determination and Depletion

Step 2:DepletionExpense =

DepletionPer Unit

×Units Extracted and Sold in Period

DepletionPer Unit

= Cost Total Units of Capacity

Step 1:

P5

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Apex Mining acquired a tract of land containing ore deposits. Total costs of acquisition and development were $1,000,000 and Apex estimates the land contained 40,000 tons of ore. During the first year of operations Apex extracted and sold 13,000 tons of ore.

Apex Mining acquired a tract of land containing ore deposits. Total costs of acquisition and development were $1,000,000 and Apex estimates the land contained 40,000 tons of ore. During the first year of operations Apex extracted and sold 13,000 tons of ore.

Depletion of Natural ResourcesP5

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Step 2: Depletion Expense

= $25 per ton × 13,000 Tons = $325,000

Step 1:DepletionPer Unit

= $1,000,000 - $0 40,000 tons

= $25 per ton

Depletion ExpenseP5

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Machine hour rate method

This is also known as service hour method. This method take into account the running time of the asset for the purpose of calculate depreciation.

Original cost of asset - Scrape value Estimate life(in hour)

For Example

Machine hour rate= 10000-1000 10000

Machine hour rate = 0.9/hour

Chapter 10-31

Hours Rate per Annual Accum.Year Used Hour Expense Deprec.

2007 200 x $105 = 21,000$ 21,000$

2008 150 x 105 = 15,750 36,750

2009 250 x 105 = 26,250 63,000

2010 300 x 105 = 31,500 94,500

2011 100 x 105 = 10,500 105,000

1,000 105,000$

DepreciationDepreciationDepreciationDepreciation

Exercise (Machine hour rate)

($105,000 / 1,000 hours = $105 per hour)

Declining Method

Types of declining method.1.Reducing installment method2.Sum of Year digit method3.Double declining method

Reducing Balance method

• Under this method depreciation is calculated on the book value.

• It is also known as Diminishing balance.On next page you will see its example.

Book Value:-Remaining life of an asset is

known as Book Value.Asset Depriciation1.100000 10%10000 900002.90000 10%9000 810003.81000 10%8100 729004.72900 10%7290 65610


2010 100000rs (100000×10)/100=10000

Balance of C/D 90000

100000 100000

2011 90000 (90000×10)/100=9000


90000 90000

2012 81000 (81000×10)/100=8100


81000 81000



This method is on the pattern of diminishing balance method the amount of depreciation to be charged to the profit or loss account under this method depreciation decrease every year.

Formula of (SYD)

Depreciaton = Remaining life of asset(including current year) x Original cost

Sum of All digit(Estimatted life)

Examplei. Cost of machinery = Rs 10000ii. Effective Working life = 3 yeariii. Depreciation =3 year1st year depreciation = (3 x 10000) / 1+2+3

= 50002nd year depreciation= (2x10000) / 6

= 33333rd year depreciation= (1x 10000) / 6

= 1667


2010 10000rs (10000×3)/6=5000

Balance of C/D 5000

10000 10000

2011 5000 (10000×2)/6=3333

Balance of C/D 1667

5000 5000

2012 1667 (10000×1)/6=1667

1667 1667

Decreasing annual depreciation expense over the asset’s useful life.

Double-Declining-Balance

DepreciationDepreciationDepreciationDepreciation

SO 3 Compute periodic depreciation using different methods.SO 3 Compute periodic depreciation using different methods.

Declining-balance rate is double the straight-line rate.

Rate applied to book value (cost less accumulated depreciation).

Illustration 10-14

Example

Cost of plant= 117900Estimated life= 5yearScarp value= 12900Straight lineDepreciation= Original cost – Scrap value

Estimated life= 117900 – Scrap value

5(year)

Net Rate per Annual Accum.Year Bookvalue Year Expense Deprec.

2007 117,900$ x 40% = 47,160$ 47,160$

2008 70,740 x 40% = 28,296 75,456

2009 42,444 x 40% = 16,978 92,434

2010 25,466 x 40% = 10,186 102,620

2011 15,280 x 40% = 2,380 105,000

105,000$

DepreciationDepreciationDepreciationDepreciationExercise (Double-Declining Balance Method)

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Depreciation methods

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