DEPRECIATION & ITS WORKING ON ASSET / EQUIPMENT DEPRECIATION IS A FIXED AMOUNT OF THE ASSET VALUE ( EQUIPMENT PURCHASE VALUE) THAT iS WRITTEN OFF EVERY YEAR, FROM THE BOOKS OF ACCOUNT & THE ASSET VALUE DECREASES EVERY YEAR DURING ITS LIFE SPAN, THIS IS DONE AS THE EQUIPMENT / ASSET WEARS OFF, DURING ITS VALUE EVERY YEAR ? ITs MARKET VALUE ‘GOES DOWN ACCORDINGLY. SUCH AMOUNT OF DEPRECIATION, 1s SHOWN AS EXPENDITURE IN THE BOOKS OF ACCOUNT. THE METHODS DEPLOYED IN DEPRECATION ARE AS UNDER. STRAIGHT LINE METHOD UNIT PRODUCTION METHOD DOUBLE DECLINE METHOD DECLINING BALANCE METHOD Peep LET US UNDERSTAND THESE METHODS, WITH EXAMPLES HOWEVER WE NEED TO UNDESTAND CERTAIN TERMINOLOGIES, BEFORE THAT. PURCHASE VALUE ~ THIS IS THE VALUE OF THE ASSET WHILE IT WAS PROCURED, WHICH INCLUDES ITS PRICE WITH ALL LEVIES / TAXES, TRANSPORTATION COST, ERECTION AND COMMISSIONING COST. IT IS NORMALLY DESIGNATED AS“ P “ RESIDUEL VALUE — IT IS THE COST OF THE EQUIPMENT, AT THE END OF ITS LIFE PERIOD, WHICHIS NORMALLY ITS SALEVALUE T THEEND OF ITS LIFE . IT IS NORMALLY DESIGNATED as™R™ Sawanje Value LIFE OF ASSET— “L“ NUMBER OF UNITS THE ASSET / EQUIPMENT CAN PRODUCE DURING ITS LIFE SPAN” Ni 1. STRAIGHTLINE METHOD —THE OTHER NAME FOR THIS IS UNIFORM DEPRECIATION: METHOD, WHERE IN THE DEPRECIATION DEDUCTED EVERY YEAR Is SAME. - HERE THE DEPRECIATION PER YEAR =( P - R)/L 2 EX. COST OF DUMPER PURCHASED 15 RS 20 LAKHS, LIFE OF THE SAME IS 9 YEARS & RESIDUEL VALUE IS RS 2LAKHSSO THE DEPRECIATION PER YEAR IS =( 20-2 )/9 = 2 LAKHS. SO THE WOV 4WRITTEN DOWN VALUEJOF THIS DUMPER AFTER 1 YEAR IS 20-2 = 18 AKIS, ay WDV AFTER 2 YEARS WOVIS 18-2 = 16¥EaRS *” sen? WOV AFTER 3 YEARS WDVIS 16-2 = 14.YEARS ¥ SO ON. SO YOU FIND HEREIN THIS METHOD THE DEPRECIATION Is UNIFORM (AND SO IT S NAME STRAIGHT LINE OR UNIFORM DEPRECIATION METHOD, wre fut ieL wore ereort ted a TIC memod iy cuptetywietobed bo = Celatect we me ND Gunit) » IN THIS METHOD THE DEPRECIATIONS DIVIDED INTO NO OF THE UNITS THE EQUIPMENT / ASSET CAN PRODUCE DURING ITS LIFE PERIOD 7 UFE SPAN, ty o> 6 s wesed on BH nah HERE THE DEPRECIATION OF THE ASSET AFTER 1YEAR=(P-R)/ NX N1, WHEREIN Na IS THE NO OF UNITS PRODUCED BY THIS ASSET IN TH EENTIRE 1 ST YEAR. EX. ASSET PROCE 10000/- UFE SPAN 9 YEARS INO OF UNITS IT CAN PRODUCE DURING ITS LIFE SPAN IS 9000 NO OF UNITS PRODUCED IN ITS 1ST YEAR IS 2000 NO OF UNITS PRODUCED IN ITS 2ND YEAR IS 1500 RESIDUEK VALUE 1000/- SO THE DEPRECIATION AT THEEND OF ITS 1 YEAR = (10000~ 1000)/ 9000 x 2000 = 2000/- SO WDV AFTER 1 YEAR = 10000- 2000 = 8000/- SO THE DEPRECIATION AT THEEND OF ITS 2ND YEAR 3500/- “teeeqt oD. Pee THER ELRAEEPLPALALEALALAAA é teooo. pow ,1see = fseo T 2 ‘ceo SO WDV AFTER 1 YEAR = 10000- 3500= 6500/= geow— 1 oD = ESO AcedMored Depreciations Weld. 3. DOUBLE DECLINE METHOD —IN THIS METHOD THE DECLINE IN ASSET VALUE IS FASTER AS COMPARED TO THE STRAIGHT LINE METHOD. THIS METHOD IS USED ‘ ESPECIALLY IN THE ASSETS , WHERE IN THE EQUIPMENT OBSOLESCENCE OR THE EQUIPMENT GETTING QUTDATED IS VERY HIGH, AS THE DEPRECIATION ATHIGHER: RATE IS ALREADY DEPRECIATED. SIMILARLY THE PROJECTS WHICH HAVE HIGHER PROFITS IN THINITIAL YEAR AND LOWER < IN TH ELATER YEARS, THIS METHOS SUITS AS THE ASSETS IS ALREADY DEPRECIATED DURING INITIAL YEARS WHEN PROFIT IS HIGH AND AS SUCH , THE PROFIT IS NOT UNDER PRESSURE IN LATER YEARS AS THE DEPRECIATION THEN IS LOWER IN THIS METHOD, . dasted dep ongene « s 4 ty th on4 Diminishian Pat memo a EX. P = 16000/- L=5 YEARS IN THIS CASE BY STRAGHT LINE METHOD, THE DEPRECIATION IS 100/ 5 ==20 % IN DOUBLE DEPRECIATION METHOD THE DEPRECIATION WOULD BE DOBLE OF DEPRECIATION AS IN CASE OF STRAGHT LINE METHOD HENCE THE NAM EOF THE METHOD AS” DOUBLE DECLINE METHOD “ i \ YEAR BOOK VALUE IN HE BEGINNG OF YEAR|DEPRECIATION% | DEPRECIATION VALUE ot 1 16000/- reooo « bee ag. il i) 2 brapelentichaen seo0 = 40 | aeaofe (576° (ocoo- 304 100 3 er et | 40 | 2304/- 4 3456/- | ssezao \2072 5. 2073/- \ wo | 829.44 Concronk Pacentate memod te Matnesen horn o DECLINING BALANCE METHOD- THIS IS SIMILAR TO THE DOUBLE DECLINE METHOD , BUT INSTEAD OF DOUBLE DECLINE, HERE IT IS VARIABLE % OF DECLINE, WHICH IS CHOSEN DIFFERENT AS PER THE REQUIREMENT SO HERE THE DECLINING BALANCE DEPRECIATION =A(1/L)(P~AD) DECLINE % L = LIFE OF EQUIPMENT P= PURCHASE COST ‘AD = ACCUMULATED DEPRECIATION STEPS TO BE FOLLOWED IN THIS METHOD - STEP 1. IDENTIFY ASSETS OPENONG VALUE pr STEP 2. DEPRECIATIONG RATE AS PER STRAIGHT LINE METHOD = uy Ae STEP 3. IDENTIFY DECLINE % WHICH IIS = STRAIGHT LINE DEPRECIATION RATE TO WORK (OUT THE DECLINE DEPRECIATION RATE |EPRECIATION RATE = DECLINE X STRAIGHT LINE RATE SO DECLINE DI EXPENSE = DECLINE DEPREIATION RATEX STEP 4, DECLINE BALANCE DEPRECIATION ORIGINAL BOOK VALUE oR = DECLINE DEPRECIATION RATE X (.COST- ACCUMULATED STEP 5. SUBSTRACT DEPRECIATION EXPENSE FROM OPENING BOOK VALUE 7 CHECK THAT IT IS NOT LESS THAN ITS SALVAGE VALUE. DEPRECIATION }EXAMPLE - ASSET VALUE 20000/-, LIFE 5 YEARS, SALVAGE VALUE ~ 4500/- STRAIGHT LINE DEPRECIATION = 1/s =0.2 = 20% DOUBLE DECLINE METHOD RATE 2x 20% = 40% DEPRECIATION ON 1 ST YEAR = 40/100x 20000 = 8000/- $0 BOOK VALUE AFTER 1 YEAR = 20000-8000 =12000/- DEPRECIATION FOR 2 YEAR = 40/100x 12000 = aso0/- ‘$0 BOOK VALUE IN THE BEGINNIN OF 3% YEAR = 20000-8000-4800 = 7200/- DEPRECIATION FOR 3 RD YEAR 40/100x 7200 =2880/. SO THE BOOK VALUE AFTER 3 YEARS —