Depreciation

Meaning - Depreciation may be defined as the permanent and continuing diminution in

the quality or the value of an asset.

Methods of Depreciation

1. Straight line or Fixed Installment Method

A fixed or equal amount is to be charged as depreciation every year during the life time
of the asset. The amount of depreciation remains equal from year to year. The expected
lifetime of the asset is calculated and the cost of the asset is spread over its lifetime.

Depreciation expense per annum=Original cost/number of years of useful life

If the fixed asset is expected to have a scarp value at the end of its useful life, then

Depreciation expense per annum= (Original Cost-Estimated scrap value)/Number of

years of useful life.

2. Reducing Balance or Diminishing Balance Method

The value of asset goes on diminishing year after year, the amount of depreciation
charged every year also goes on declining. Every year a fixed percentage of the net
book value of the asset is reduced. For example 20% depreciation is charged. If the
asset has a value of $10000, the depreciation for the first year will be 20% of $10000
i.e. $4000. The book value for the next year will be now $6000. This year the
depreciation will be again 20% of the remaining value i.e. 20% of 6000=$1200. So the
remaining value of the asset is now $6000-$1200=$4800.
 Straight line or Fixed Installment Method

Example – 1 X Ltd purchased a machine costing $ 10000 and residual value of

the machine was $ 2000 after the useful life of 5 years calculate the depreciation

as per straight line method and rate of depreciation.

Depreciation = Cost of the asset – Scrap value (Residual value)

Estimate useful life of the asset

10000-2000 = 1600
5

Rate of depreciation = Depreciation = 1600 X 100 = 16%

Cost of asset 10000

Reducing Balance or Diminishing Balance Method

Using the information in example no 1 calculating depreciation

1st year depreciation = 10000 x 16% = 1600

2nd year depreciation = (10000 – 1600) x 16% = 1344
3rd year depreciation = (10000-1600-1344) x 16% =1129
4 year depreiciation = (10000 -1600 – 1344 – 1129) x 16% = 948
 Q – 1 K Ltd purchased a machine on 1 Jan 2015 for $ 40 000 and another

machine purchased on 1 July 2015 for cash for same value. K Ltd charged

depreciation on machines at 10% per annum by straight line method. Books of K

Ltd ends on 31 December each year.

Required:

1. Prepare Machinery Account for the year 2015 ,2016 and 2017

2. Prepare provision for Depreciation on machine account

Q – 2 On 1st April 2012 Karma Ltd purchased two Machines from Hussain Ltd on cash

for $ 50 000 each. It was decided to write off depreciation on machines at 10% per

annum following Straight line method.

Karma Ltd books closed on 31st March of every year.

Required:

1. Prepare Machinery Account for three years.

2. Prepare provision for Depreciation on Machine Account

Q – 3 On 1st April 2012 X Ltd Ltd purchased two Machines for cash $ 90 000 each. It

was decided to write off depreciation on machines at 10% per annum following

diminishing balance method. Zen Ltd Ltd books closed on 31st March of every year.

Required:

Prepare Machinery Account for three years.

Prepare provision for Depreciation on Machine Account

Financial year – 1 April – 31st March

Calendar year = 1 Jan – 31 Dec

Current financial year 1 April 2020 – 31 st March 2021

Q – 4 On 1st April 2012 Puma Ltd purchased one Machine from XY Ltd by cheque for $

40 000 and on 1 july 2012 another machine purchased from P Ltd on credit for 45000. It

was decided to write off depreciation on machines at 10% per annum following

Diminishing balance method.

Puma Ltd books closed on 31st March of every year.

Required:

1. Prepare Machinery Account for three years.

2. Prepare provision for Depreciation on Machine Account