Depreciation and its methods with full explanation enjoy @Silent Prince@

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Presentation
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11. Silent Prince

13. Depreciation:-
Gradual decrease in the value of an asset
is known as depreciation.
It has two types:-
1- Internal depreciation.
2- External depreciation.

14. Formula of Depreciation
Depreciation =
Cost of Asset
No of year

15. 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.

16. Causes of depreciation
• Wear and Tear
• Obsolescence

17. 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.

18. 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.

19. Types of Uniform Charge method
• Straight line method
• Depletion method
• Machine rate method

20. 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.

21. Formula of straight line method
Depreciation= Original cost of an asset- scrap value
Estimated life
For percentage of depreciation:-
Depreciation ×
Depreciation × 100
Original asset

22. Market price of an assets:-
Scarp value of an asset:-
Working Life of an asset:-

23. 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-Depreciation
10000-2500=7500

24. 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

25. 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.

26. Natural Resources:
Cost Determination and Depletion
Step 2:
Depletion
Expense
=
Depletion
Per Unit
×
Units Extracted
and Sold in
Period
Depletion
Per Unit
= Cost
Total Units of Capacity
Step 1:
P5
8-26

27. 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
8-27

28. Step 2:
Depletion
Expense
=
$25 per ton × 13,000 Tons = $325,000
Step 1:
Depletion
Per Unit
=
$1,000,000 - $0
40,000 tons
= $25 per ton
Depletion Expense
P5
8-28

29. 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)

30. For Example
Machine hour rate= 10000-1000
10000
Machine hour rate = 0.9/hour

31. 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$
Depreciation
Exercise (Machine hour rate)
($105,000 / 1,000 hours = $105 per hour)

32. Declining Method
Types of declining method.
1. Reducing installment method
2. Sum of Year digit method
3. Double declining method

33. 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.

34. Book Value:-
Remaining life of an asset is
known as Book Value.
Asset Depriciation
1. 100000 10%10000 90000
2. 90000 10%9000 81000
3. 81000 10%8100 72900
4. 72900 10%7290 65610

35. Date Assets Depreciation
2010 100000rs (100000×10)/100
=10000
Balance of C/D 90000
100000 100000
2011 90000 (90000×10)/100
=9000
Balance of C/D 81000
90000 90000
2012 81000 (81000×10)/100
=8100
Balance of C/D 72900
81000 81000
Assets-Depreciation
100000-10000=90000

36. 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.

37. Formula of (SYD)
Depreciaton = Remaining life of asset(including current year) x Original cost
Sum of All digit(Estimatted life)

38. Example
i. Cost of machinery = Rs 10000
ii. Effective Working life = 3 year
iii. Depreciation =3 year
1st year depreciation = (3 x 10000) / 1+2+3
= 5000
2nd year depreciation= (2x10000) / 6
= 3333
3rd year depreciation= (1x 10000) / 6
= 1667

40. Date Assets Depreciation
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

41. Decreasing annual depreciation expense over the
asset’s useful life.
Double-Declining-Balance
Depreciation
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

42. Example
Cost of plant= 117900
Estimated life= 5year
Scarp value= 12900
Straight line
Depreciation= Original cost – Scrap value
Estimated life
= 117900 – Scrap value
5(year)

43. 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$
Depreciation
Exercise (Double-Declining Balance Method)
Plug
Plug

44. Thank You