DEPRECIATION METHODS

Submitted to Sir Rakesh Kumar

SADAF HUSSAIN
BBA8
Straight-line depreciation
This method allocates the same proportion of the depreciation expense to assets
useful life for each period of the time.
The annual depreciation cost is determined by subtracting expected residual
value or salvage value from the cost of the asset and dividing the remaining
depreciable expense by the years of estimated useful life
Annual depreciation =
(Historical cost of the asset-the estimated salvage value of the asset) / The
useful life of the asset. It is also the most widely used technique in Pakistan.
Example of calculating straight-line method:
Suppose the purchased vehicle has the original value of 20,000pkr and residual
value of the 2000pkr and useful life of 6 years.
The depreciation of the vehicle for one year by using the formula is
(20000-2000)/6= 3000pkr
The depreciation expenditure is listed on the income statement as a revenue
reduction, and accumulated depreciation is listed as a contra account to its
associated Delivery Truck asset account (reduces the cost of the asset to its
book value).
Activity-based depreciation
In this method of the depreciation, the depreciation cost is determined on basis
of the activity like the number of units generated or the number of hours during
which the asset is used. It means this method is based on the actual usage of the
asset, not on the time period of the asset.
The formula for calculating the activity-based depreciation
{(Original cost-residual value)/total estimated life of activity of asset}*Actual
activity performed during the time
Example:
The Pakistani firm has purchased the machinery for packaging at that price of
100,000 pkr on Jan 1, 2019. The truck has a residual value of 10,000 pkr and
useful life of 10 years, expected productive life in hours 15,000 hours and the
truck was used for 1500 hours in the period of 2019
Solution:
Depreciation expenses = [(100,000 – 10,000)/15,000] × 1500
= 9,000
The depreciation for the year 2019 would be 9,000. The machinery will be fully
depreciated when it would use 10,000 hours.

Accelerated depreciation:
In this depreciation method in the early years of the life of the asset, greater
amounts of depreciation are noted, and smaller amounts are noted in later years.
However, both the straight-line approach and accelerated approaches consider
the same cumulative amount of depreciation over the whole life of the asset.
There are different methods of accelerated depreciation.
The most commonly accelerated type is known as a fixed percentage of
declining balance (double declining, 150 declining) this method is commonly
used in income statements than financial statements and sum of units’
depreciation method.
Annual depreciation expense under this method is calculated as follows:
Depreciation expense= beginning book value* Accelerated Depreciation Rate
The rate of accelerated depreciation remains the same thorough out the life of
the asset.
The accelerated rate of depreciation remains constant throughout the asset's life.
Every year the book value decreases (cost minus accumulated depreciation) and
represents the declining-balance.

Double declining:
This is a type of the accelerated depreciation method in which the specified
percentage is 200 which means that the accelerated rate is twice the straight-
line. In the first year of an asset's life, it determines a higher depreciation cost
and progressively reduces depreciation costs in subsequent years.
Suppose the firm has purchase the depreciable asset with the cost of 30000pk
and have a salvage value of 5000pkr has 5 years of useful life. Before
calculating the double-declining depreciation we would calculate the straight-
line deprecation.so, by ignoring the salvage value the straight-line depreciation
is,
100%/5= 20% and with the double declining the depreciation would be 20%*2=
40%
Apply the rate to the book value of the asset. The book value of any asset is
calculated by deducting the accumulated depreciation from the original cost of
asset. When the book value is zero no depreciation is applied.
Sum of years digits depreciation method:
This method is used to calculate the accelerated depreciation for an asset. The
original cost, residual value and useful life of the asset are used to calculate the
depreciation.
This method takes the number of total years for depreciating the asset, a number
of years are added and the result from the sum of the years is used as the base
for the weightage of the amount of the depreciation in accelerated way.
.
For example, an asset that has an original cost of 80,000pkr, a residual value of
10,000pkr, and has a useful life of 3 years.
The Sum of the year’s digits adds up to 3+2+1 equal to 6. In the first years, the
weight of the depreciation is 3/6 or 50%, for the second year 2/6 or 33.33%, and
for the third year is 1/6 of 16.67%.
The depreciable value of the asset is 80000-10000 or 70000pkr.
The sum-of-digits depreciation schedule is as follows:
For Year 1:
Depreciation amount is 50%*70000=35000pkr
For Year 2:
The depreciation amount is 33.33%*70000 or 23,331pkr
For Year 3:
The amount of depreciation is 16.67%*70,000 or 11662.