DEPRECITION

1. ENGINEERING ECONOMICS AND
COSTING
TOPIC NAME: DEPRECIATION
PROJECT DONE BY :
GOUTAM KUMAR DASH
KALINGO AUROBINDO NAYAK
BUCHIREDDY

2. WHAT IS DEPRECIATION?
Depreciation reduces the value of assets on a
residual basis. It also reduces the profits of the
current year.
Depreciation indicates reduction in value of any
fixed assets. Reduction in value of assets depends
on the life of assets. Life of assets depends upon
the usage of assets.
There are many deciding factors that ascertain the
life of assets. For example, in case of a building, the
deciding factor is time. In case of leased assets, the
deciding factor is the lease period. For plant and
machinery, the deciding factor should be
production as well as time. There can be many
factors, but the life of assets should be ascertained
on some reasonable basis

3. Causes of Depreciation:
1. Wear and tear:
• Assets diminish in their value as they are constantly used in the organization. The difference
between the value of an asset when it was bought and its value being used for sometime
represents wear and tear.
2. Exhaustion:
• Assets are bound to lose their value as time progress. Consequently, productivity declines.
Assets exhaust their value and are found useless after the elapse of a certain fixed period.
3. Depletion:
• Natural resources such as mines, quarries and oil wells are of a wasting character. As a result of
gradual exhaustion, the value of wasting assets declines. They are consumed gradually.
4. Deterioration:
• Deterioration means erosion in value of those assets which have a very short life. Proper
repairs and maintenance of these assets cause an additional loss by way of deterioration.

4. External Causes of Depreciation
1. Passage of time
• The utility of some fixed assets is confined to a time frame. Assets like leasehold property become useless
after a period. Assets like trademark, patents lose their value with the passage of time.
2. Obsolescence
• Obsolescence implies the chance of an asset becoming out of fashion. This is a loss arising on account of new
invention, technological changes, improvement in production methods, legal restraints etc. These factors
make it economical to replace the assets though they are still usable.
3. Permanent fall in the market value
• Assets like investments lose their value due to a downfall in their market value. It is only the permanent fall
in the value of asset. Temporary shrinkage in the value of assets should be ignored for depreciation
calculation.
4. Weather and accidental elements
• Assets lose their value due to weather, rain, sunshine or any accident like fire, earthquake, flood, tidal forces
or similar other disasters. The effect of these factors enters into calculating depreciation.

5. Why Do We Need to Account for Depreciation?
Here is why we need to provide depreciation
To ascertain the true profit during a year, it is desirable to charge
depreciation.
To ascertain the true value of assets, depreciation should be charged.
Without calculating the correct value of assets, we cannot ascertain the true
financial position of a company.
Depreciation allows to take the advantage of tax benefit.

6. Factors Affecting Depreciation Calculation
1.Value of Assets:
• Value of depreciable asset is the cost of the same asset that represents its money outlay or its
equivalent in connection with its acquisition, installation and commissioning as well as for additions to
improvements thereof. An increase or decrease in long term liability on account of exchange
fluctuations, price adjustments, changes in duties or similar factors may cause changes in the historical
cost a depreciable asset.
2.Estimated working Life:
• Working life is determined by
Legal or contractual limits such as the expiry dates of related leases.
3.Obsolescence:
• An asset is likely to become outdated due to change in technology. The possibility of an asset going out
of fashion should be carefully weighed while calculating the amount of depreciation.
4.Loss of Interests:
• The purchase of an asset involves a heavy sum. It may be alternatively invested elsewhere. So, capital
involved in the purchase of an asset implies a loss of interest on alternative investment.

8. What is Straight Line Depreciation?
• the straight line depreciation method, the value of an asset is reduced
uniformly over each period until it reaches its salvage value. Straight
line depreciation is the most commonly used and
straightforward depreciation method for allocating the cost of
a capital asset. It is calculated by simply dividing the cost of an asset,
less its salvage value, by the useful life of the asset.

9. Formula to calculate

10. Company A purchases a machine for $100,000 with an estimated salvage value of $20,000 and a useful
life of 5 years.
The straight line depreciation for the machine would be calculated as follows:
1.Cost of the asset: $100,000
2.Cost of the asset – Estimated salvage value: $100,000 – $20,000 = $80,000 total depreciable cost
3.Useful life of the asset: 5 years
4.Divide step (2) by step (3): $80,000 / 5 years = $16,000 annual depreciation amount
Therefore, Company A would depreciate the machine at the amount of $16,000 annually for 5 years.
The depreciation rate can also be calculated if the annual depreciation amount is known.
The depreciation rate is the annual depreciation amount / total depreciable cost. In this case, the machine
has a straight-line depreciation rate of $16,000 / $80,000 = 20%.

11. year Book value
(beginning of
year)
depreciation
rate
Annual
depreciation
Book value
[End of year]
1 1,00,000 20% 16,000 84,000
2 84,000 20% 16.000 68,000
3 68,000 20% 16,000 52,000
4 52,000 20% 16,000 36,000
5 36,000 20% 16,000 20,000
Note how the book value of the machine at the end of year 5 is the same as the
salvage value. Over the useful life of an asset, the value of an asset should
depreciate to its salvage value.

12. Double-declining balance method
• The double declining balance depreciation (DDB) method, also known
as the reducing balance method, is one of two common methods a
business uses to account for the expense of a long-lived asset.
• The double declining balance depreciation method is an accelerated
depreciation method that counts as an expense more rapidly (when
compared to straight-line depreciation that uses the same amount of
depreciation each year over an asset's useful life).
Depreciation = 2 * Straight line depreciation percent * book value at the beginning of
the accounting period
Book value = Cost of the asset – accumulated depreciation

13. Example: On April 1, 2012, company X purchased an equipment for Rs. 100,000. This is expected to have
5 useful life years. The salvage value is Rs. 14,000. Company X considers depreciation expense for the
nearest whole month. Calculate the depreciation expenses for 2012, 2013, 2014 using a declining balance
method
• Useful life = 5
• Straight line depreciation percent = 1/5 = 0.2 or 20% per year
• Depreciation rate = 20% * 2 = 40% per year
• Depreciation for the year 2012 = Rs. 100,000 * 40% * 9/12 = Rs.
30,000
• Depreciation for the year 2013 = (Rs. 100,000-Rs. 30,000) * 40% *
12/12 = Rs. 28,000
• Depreciation for the year 2014 = (Rs. 100,000 – Rs. 30,000 – Rs.
28,000) * 40%= 16,800

14. Year
Book value at
the beginning
Depreciation
rate
Depreciation
Expense
Book value at
the end of the
year
2012 Rs. 100,000 40% Rs. 30,000 * (1) Rs. 70,000
2013 Rs. 70,000 40% Rs. 28,000 * (2) Rs. 42,000
2014 Rs. 42,000 40% Rs. 16,800 * (3) Rs. 25,200
2015 Rs. 25,200 40% Rs. 10,080 * (4) Rs. 15,120
2016 Rs. 15,120 40% Rs. 1,120 * (5) Rs. 14,000
Depreciation table is shown below:
Depreciation for 2016 is Rs. 1,120 to keep the book value same as salvage value.
Rs. 15,120 – Rs. 14,000 = Rs. 1,120 (At this point the depreciation should stop).