1. (c) 2001 Contemporary Engineering Economics
1

2. DEPRECIATION
PRESENTED BY:
TAHSEEN ULLAH
Class No: 01
BBA(H) 5th semester
ABDUL WALI KHAN UNIVERSITY
MARDAN (PABBI CAMPUS)

4. Depreciation
Depreciation: represents the
systematic allocation of the cost
of a capital asset over a period of
time for financial reporting
purposes, tax purposes, or both.

5. What Can Be Depreciated?
A qualifying asset for depreciation must satisfy all these
conditions:
 should be used in business
 should have a definite useful life and a life longer than 1 year
 must wear out, become obsolete or lose value

6. Types of Depreciation
Book Depreciation
Tax Depreciation

7. Book Depreciation
 Book Depreciation is provided as per the
prevailing accounting standards and the
necessary law of land.

8. Tax Depreciation
 Tax Depreciation is provided as per the
prevailing taxation laws.

9. Methods to Calculate Depreciation

Straight-Line Method

Declining Balance Method

MACRS Method

10. Required Factors in Calculating Asset
Depreciation
 Useful life of asset
 Residual value
 Cost basis
 Method of depreciation

11. 1. Straight-Line (SL) Method
Principle
A fixed asset provides its service in a uniform
fashion over its life
Formula
Annual Depreciation = cost – residual value
useful life

12. EXAMPLE
(Straight-Line Method)
Cost of machinery = $45,000
Residual value = $5,000
Useful life = 5 years.
Calculate annual cost of depreciation?
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Book Value
$45,000
First
(45,000-5,000)/5
$8,000
$8,000
37,000
Second
(45,000-5,000)/5
8,000
16,000
29,000
Third
(45,000-5,000)/5
8,000
24,000
21,000
Fourth
(45,000-5,000)/5
8,000
32,000
13,000
Fifth
(45,000-5,000)/5
8,000
40,000
5,000
Total
40,000

13. Example - (Straight-Line Method)
Annual
Depreciation
expense
1
2
3
Years
4
5

14. 2. Declining Balance Method
Principle
A fixed asset provides its service in a decreasing fashion.
The book value is reduced by a fixed percentage each
year.
Formula
Annual Depreciation = Depreciation rate * Book value at
start of year

15. EXAMPLE
( Declining Balance Method)
Cost of machinery = $70,000
Residual value = $5000
Useful life = 5 years
Cost of annual Depreciation?
Year
Computation
DBM=100% 2
5years
DBM= 40%
Depreciation
Expense
Accumulated
Depreciation
Book Value
$70,000
First
$70,000 x 40%
$28,000
$28,000
42,000
Second
42,000 x 40%
16,800
44,800
25,200
Third
25,200 x 40%
10,080
54,880
15,120
Fourth
15,120 x 40%
6,048
60,928
9,072
Fifth
9,072-$5,000
4,072
65,000
5,000
Total
65,000

16. Example – Declining Balance Method
Annual
Depreciation
expense
1
2
3
Years
4
5

17. 3. MACRS Method
Principle
An asset has a fixed life according to the category in
which it falls.
The residual value is always zero.
Formula
Annual Depreciation = cost x appropriate MACRS % rate

18. MACRS Schedule
R e c o ve ry
Year
1
2
3
4
5
6
7
8
P ro p e rty C la s s
3 -Y e a r
5 -Y e a r
3 3 .3 3 %
2 0 .0 0 %
4 4 .4 5
3 2 .0 0
1 4 .8 1
1 9 .2 0
7 .4 1
1 1 .5 2
1 1 .5 2
5 .7 6
7 -Y e a r
1 4 .2 9 %
2 4 .4 9
1 7 .4 9
1 2 .4 9
8 .9 3
8 .9 2
8 .9 3
4 .4 6

20. EXAMPLE
(MACRS Method)
Cost of tractor = Rs. 30,000
Cost of annual Depreciation?
Year
Computation
Depreciation Accumulated
Expense
Depreciation
Book Value
$30,000
First
33.33% x 30,000
9,999
9,999
20,001
Second
44.45% x 30,000
13,335
23,334
6,666
Third
14.81% x 30,000
4,443
27,777
2,223
Fourth
7.41% x 30,000
2,223
30,000
0