ECONOMICAL ASPECTS

OF
HANDLING EQUIPMENT

METHODS OF CALCULATING
DEPRECIATION

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 METHODS OF CALCULATING
DEPRECIATION
Following are the methods of calculating depreciation:
 Straight Line Method
 Diminishing Balance Method
 Sinking Fund Method
 Annuity Charging Method
 The Insurance Policy Method
 The Revaluation or Regular Valuation Method
 Machine Hour Basis Method
 The sum of the Year's Digits Method
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 Straight Line Method
 This method assumes that the loss of value of
machine is directly proportional to its age.

 It means one should deduct the scrap value

from the original value and divide the
remaining value by the number of years of
useful life to obtain depreciation amount per
year.

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 Let ;
C = initial cost of a machine.
S = scrap value.
N = Number of years of useful life of machine, and
D = depreciation amount per year.

Then, D = (C-S) / N

This method of calculating depreciation fund is also

known as "Fixed Installment" method, because every
years same (fixed) amount is deducted and no
consideration is made about the maintenance and
repair charges, which gradually increases as the
machine is getting old.
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 Diminishing Balance Method
 This is also called "Reducing Balance"
Method.

 The diminishing value of machine is much

greater in the early years. It depreciates rapidly
in the early years and later on slowly.
Therefore, it is better to depreciate much
during the early years, when the repair and
renewals are not costly.

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 Under this method, the book value of the
machine goes on decreasing as its existence
continues. A certain percentage of the current
book value is taken as depreciation. Therefore,
this is also called "Percentage on Book Value"
method.

 Let x be the fixed percentage to calculate the

yearly depreciation on the book value.

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Then,
x = 1 – [S / C]1/N

where,
C = Initial cost,
S = Scrap value,
N = No. of the years of life.