This document discusses different methods for calculating depreciation of assets. It defines depreciation as the decline in value of an asset due to usage, damage, or obsolescence over time. Four methods are described: straight-line, diminishing balance, sum of years digits, and annual revaluation. Straight-line method assumes constant usage and calculates depreciation as (cost - salvage value) / useful life. Diminishing balance and sum of years digits methods assume greater usage and depreciation early in an asset's life.

1. DEPRECIATION
SUB-FMPRE,SEM-6TH
Prepared by:Sushma Priya(Ph.D Scholar)
B.A.U.,Sabour,Bhagalpur

2. CONCEPT OF DEPRECIATION
• Depreciation is defined as the decline in the value of asset due to usage,accidental
damage and time obsolescence.
• When an assets is used,it undergoes wear and tear(degradation of an assets from
ongoing usage) and hence the reduction in the value of assets which is termed as
depreciation.
• Even if the asset is not used its value declines,over a period of time,because the asset may
became outdates or outmodelled or go out of fashion.This is known as time depreciation.
• Weather is also an important factor that causes decline in the value due to corrosion.
• To compute depreciation we need information on original cost of assets,useful life and
junk value.

3. Important definition
• Useful life:It is the number of years that an asset provides its services to
the farm business.Useful life varies with the types of asset.
• Junk value/Salvage value:It is the value of assets at the end of its useful
life.
• Book value:It is the value based on original cost or according to its
balance sheet.

4. Methods of computation of Depreciation
1.Straight line method
2.Diminishing Balance Method
3.Sum of the Years Digits Method
4.Annual Revaluation Method

5. 1.Straight line method
• This method is applied under the assumption of constant use of assets over the years.This
is the most popular and widely used method in computing depreciation because of the
simplicity in calculation.Following equation is used to compute depreciation:
• Annual amount of depreciation=Original cost of asset-junk value/Useful life of the
asset
• Example:
Original cost of a plough=Rs.500
Junk value=50
Useful life=5 Yr.
Annual cost of depreciation=?

6. 2.Diminishing Balance Method
• This method assumes varying rates of use of asset,year after year.The following equation is used to
compute annual amount of depreciation.
• Annual amount of depreciation=(Book value of asset)xR
Where:
R=It is the rate of depreciation to be charged over the useful life of the asset and is computed by
dividing 100 per cent with useful life.
Example:
Origianl cost of a plough=Rs.500
Useful life=5 year
R=100/5=20%

7. Computation of depreciation by Diminishing
Balance Method
Year Rate of
depreciation(
%)
Amount of depreciation(Rs.) Book Value(Rs.)=Total
value of asset or
original cost-
depreciation
1. 20 500x20/100=100 500-100=400
2. 20 400x20/100=80 320
3. 20 320x20/100=64 256
4. 20 256x20/100 204.80
5. 20 204.80*20/100 163.84
Total
value
500-163.84=336.16
We should note that higher amount of depreciation is charged in first year and less in
subsequent years.This because the asset is put to intensive use when it is brand new and
therefore wear and tear is also rapid.When asset becomes older its use gradually reduces as a
result wear and tear too is less.

8. 3.Sum of the Years Digits Method
• This method also assume that an asset is put to varying rates of use year
after year.Annual amount of depreciation is calculated from the following
formula:
• Annual amount of depreciation=
Original cost of asset-junk valuexRemaining year of useful life/Sum of
digits from one through useful life
Note:Sum of the digits can be computed quickly from the
equation=n(n+1)/2

9. Example:
Origianl cost of a plough=Rs.500
Junk value=Rs.50
Useful life=5 years
Sum of the digits of useful life=5(5+1)/2=5x3=15
Sum of the digit of useful life can also be computed by adding all the digit from
1 to useful life.
5+4+3+2+1=15

10. Computation of depreciation by Sum of the
Years Digits Method
Year Rate(Remainin
g yr of useful
life/sum of
year digit)
Amount (Rs.) Book value(Rs.)
1. 5/15 (500-50)x5/15=150 350
2. 4/15 (500-50)x4/15=120 230
3. 3/15 (500-50)x3/15=90 140
4. 2/15 (500-50)x2/15=60 80
5. 1/15 (500-50)x1/15=30 50
Total value=500-50=450
The annual amount of depreciation is declining from Rs.150 in the first year to Rs.30 in the last
year reason is already presented in diminishing balance method which holds true.

11. 4.Annual Revaluation Method
• As the name indicates,in this method the asset is revalued every year.More
specifically,the value of asset is estimated at the beginning as well at the end of
the year.
• The difference arrived indicates the depreciation or appreciation of the assets.
• In respect of livestock,as the value increases in the initial years this method
rightly catches up the amount of appreciation.However, the application of this
method to all the assets poses a problem because,it is difficult to get the actual
market prices for the assets of varying wear and tear.