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Depreciation Complete Info

# Depreciation Complete Info

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01/05/2011

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DEPRECIATION
Depreciation is the diminution in the financial value of an asset owing towear and tear, efflux of time, obsolescence or similar causes.Depreciation is a permanent continuing and gradual shrinkage in the valueof a fixed asset. It is also defined as the permanent and continuousdiminution in the quality, quantity or the value of assets.The gradual decrease in the value of an asset because of any cause.The amount of depreciation is charged on the basis of cost of machine,life of the assets and the cost of replacement.TYPES OF DEPRECIATION:-(1) STRAIGHT LINE METHOD:
Straight-line depreciation is the simplest and most-often-used technique, in which the company estimates the salvage value of the asset at the end of the period during which it will be used to generate revenues (useful life) and will expense a portionof
original cost
in equal increments over that period. The salvage value is an estimate of the valueof the asset at the time it will be sold or disposed of; it may be zero or even negative. Salvagevalue is also known as scrap value or residual value
(2) DOUBLE DECLINING DEPRECIATION METHOD:
Depreciationmethods that provide for a higher depreciation charge in the first year of an asset's life andgradually decreasing charges in subsequent years are called
accelerated depreciation methods
.This may be a more realistic reflection of an asset's actual expected benefit from the use of theasset: many assets are most useful when they are new. One popular accelerated method is the
declining-balance method
. Under this method the Book Value is multiplied by a fixed rate.
(3) WDV OR DIMINISHING METHOD:
Written down value
,applicable tomachines that have high rates of depreciation in the initial year or two, and later taper it e.g.a car, is a usable method.
Under this method, depreciation is charged at a fixed rate every year,ON THE REDUCING BALANCE
A certain percentage is applied to theprevious year’s book value, to arrive at the current year’s depreciation/ bookvalue,
WHICH SHOWS A DECLINING BALANCE, WEIGHTED FOR EARLIER YEARS, AND LOWER AND LOWER FOR LATER YEARS, as themachine grows older.
Accelerates depreciation taken in early years. Reduces the amount taken inlater years. Ignores salvage value; starts with depreciable base = asset cost.

(4) SUM OF YEAR DIGIT METHOD: Sum-of-Years' Digits is adepreciation method that results in a more accelerated write-off thanstraight line, but less than declining-balance method. Under this methodannual depreciation is determined by multiplying the Depreciable Cost bya schedule of fractions.(5)

Activity depreciation:
Activity depreciation methods are not based on time, but on a level of activity. This could be miles driven for avehicle, or a cycle count for a machine. When the asset is acquired, its lifeis estimated in terms of this level of activity. Assume the vehicle above isestimated to go 50,000 miles in its lifetime. The per-mile depreciation rateis calculated as: (\$17,000 cost - \$2,000 salvage) / 50,000 miles = \$0.30 per mile. Each year, the depreciation expense is then calculated bymultiplying the rate by the actual activity level
(6) Units-of-Production Depreciation Method:
Under theUnits-of-Production method, useful life of the asset is expressed in termsof the total number of units expected to be produced. Annual depreciationis computed in three steps.
(7) Units of time depreciation:
Units of Time Depreciation issimilar to units of production, and is used for depreciation equipment usedin mine or natural resource exploration, or cases where the amount theasset is used is not linear year to year.A simple example can be given for construction companies, where some equipment is used only for somespecific purpose. Depending on the number of projects, the equipmentwill be used and depreciation charged accordingly.
(8) Group Depreciation Method:
Group Depreciation method isused for depreciating multiple-asset accounts using straight-line-depreciation method. Assets must be similar in nature and haveapproximately the same useful lives.
(9) Composite Depreciation Method:
The composite method isapplied to a collection of assets that are not similar, and have differentservice lives. For example, computers and printers are not similar, but both are part of the office equipment. Depreciation on all assets isdetermined by using the straight-line-depreciation method.

METHODS OF DEPRECIATION (how to calculate):--
(1)STRAIGHT LINE METHOD(2)WDV OR DIMINISHING METHOD(3)SUM OF YEAR DIGIT METHOD(4)DOUBLE DECLINING DEPRECIATION METHOD
Explanations
(1)
Straight line method WDV or diminishing method :

(a)For
Example:
Say a machine costs Rs. 10,000and Rs. 1,000 (as additional set-up/installation/maintenance expenses) = Rs 11,000but we anticipate/guess its Kabari (Scrap Value) atRs. 3,000 at the end of its useful life, of say, 10 yrs,we get:
Cost of Machine + Installation + DirectlyAssociated Costs = Total Cost Total Cost - Salvage Value (At end of 10 yr.Period) = Depreciable base
10,000 + 1,000 =11000 (Total cost)11000 – 3,000 = 8,000 as the Depreciable BaseDepreciable Base = Rs. 8,000, Spread out over 10yrs = Rs. 8000/10(Yrs) = Rs 800/- depreciation peryear.