DEPRECIATION

DEPRECIATION
- Decrease in value of physical
properties with the passage of time
and use
- In an accounting aspect, it is known as
the allocation of the asset over its
useful life
- Amount set aside to compensate for
the loss in value as a result of usage
and obsolescence
 TYPES OF DEPRECIATION
1. Normal Depreciation
a. Physical Depreciation
- physical impairment of the
asset

b. Functional Depreciation
- due to a decrease in
demand for the services the
property can render
 TYPES OF DEPRECIATION

2. Depreciation due to the changes in

the price level.

3. Depletion
- decrease in the value of property
due to gradual extraction
DEPRECIATION
DEFINITION OF TERMS

a. Depreciable Properties
- Properties used in business to
produce income such as machinery,
buildings, vehicles, furniture and
equipment.
- Have determinable life
- Something that wears out and get
used up
DEPRECIATION
DEFINITION OF TERMS

b. Physical Life
- Length of time that it operates at a
profit
c. Value
- commercial sense, present worth of all
future profits that are to be received by the
owner
DEPRECIATION
DEFINITION OF TERMS

d. Market Value
- Market Price/Selling Price

e. Book Value
- Value of the product after the
depreciation cost was deducted
DEPRECIATION
DEFINITION OF TERMS

f. Salvage Value/Resale Value

- Value at the end of its useful life

g. Scrap Value
- disposal value as junk
DEPRECIATION METHODS

1. STRAIGHT LINE METHOD (SLM)

- simpler method to determine depreciation
expense and it usually is used in a scenario
where the asset is being used consistently over
the years.
 DEPRECIATION METHODS
 
1. STRAIGHT LINE METHOD (SLM)

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Where:
N –life span of the property
n – age of the property
Co – original cost (includes cost of installation)
BVn – Book value of the property at the end of n year
SV – Salvage Value of the property
d – depreciation cost
Dn – total depreciation after n years
DEPRECIATION METHODS
1. STRAIGHT LINE METHOD (SLM)

Sample Problem:

A machine cost 8,000.00 and have an

estimated life of 10 years with a salvage value
of 500.00. What is the book value after 8 years
using straight line method?
DEPRECIATION METHODS
1. STRAIGHT LINE METHOD (SLM)

Sample Problem:

The cost of equipment is 500,000.00 and the

cost of installation is 30,000.00. If the salvage
value at the end of 5 years is 10% of the cost of
the equipment, determine the book value at the
end of fourth year? Use SLM
 DEPRECIATION METHODS
 
2. DECLINING BALANCE METHOD
- method of depreciation used if the asset is
used more at the beginning and loses value
early on.

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Where:
k – annual rate of depreciation in percent.
DEPRECIATION METHODS
2. DECLINING BALANCE METHOD (DBM)

Sample Problem:
A new electric saw for cutting small pieces of
lumber in a furniture manufacturing plant has a
cost basis of 8,000.00 and a 10-year depreciable
life. Determine the value after 6 years using
declining balance method. The estimated
salvage value of the saw at the end of 10 years
is 10% of the original cost.
DEPRECIATION METHODS
2. DECLINING BALANCE METHOD (DBM)

Sample Problem:
The equipment has an initial cost of
560,000.00. Its salvage value at the end of 5th
year of useful life is estimated to be 150,000.00.
By means of DBM, determine the depreciation
charge for the 2nd year.
 DEPRECIATION
 
3. Double Declining Balance Method (DDBM)
- method used if the property is used more
frequently. Thus, using double percentage of
depreciation.

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+++……+
 DEPRECIATION
3. Double Declining Balance Method (DDBM)

Sample Problem:

The La Salle bus company decided to

purchase a new bus worth 1.2 M. The new bus
will be kept for 10 years before being sold. It’s
estimated salvage value at that time is
200,000.00. Determine the book value of the
bus at the end of 6th year using DDB method.
 DEPRECIATION
 
4. Sum of the Year’s Digit Method (SYD)
 DEPRECIATION
4. Sum of the Year’s Digit Method (SYD)

Sample Problem:

The La Salle bus company decided to

purchase a new bus worth 1.2 M. The new bus
will be kept for 10 years before being sold. It’s
estimated salvage value at that time is
200,000.00. Determine the book value of the
bus at the end of 6th year using SYD method.
 DEPRECIATION
5. Sinking Fund Method
- The sinking fund method is a depreciation
technique used to finance the replacement of
an asset at the end of its useful life.
- As depreciation is incurred, a matching
amount of cash is invested, usually in
government-backed securities.
- Companies rarely use the sinking fund
method of depreciation because of its
complexity.
 DEPRECIATION
 
5. Sinking Fund Method
 DEPRECIATION
5. Sinking Fund Method

Sample Problem:

A machine costs Php 300,000 with a salvage

value of Php 50,000 at the end of its life of 10
years. If money is worth 6% annually, use
Sinking Fund Method and determine the total
depreciation at 6th year.