Depreciation Methods

Presented by: Ismail Arshad

Straight-Line Depreciation Method

Straight-line depreciation is a very common, and the simplest, method

of calculating depreciation expense. In straight-line depreciation, the
expense amount is the same every year over the useful life of the asset.

Depreciation Formula for the Straight-Line Method:

Depreciation Expense = (Cost – Salvage value) / Useful life
Example
Consider a piece of equipment that costs Rs 25,000 with an estimated
useful life of 8 years and a Rs 10000 salvage value. The depreciation
expense per year for this equipment would be as follows:

Depreciation Expense = (25,000 – 10000) / 8 = 1875 per year

 Double Declining Balance Depreciation
Method
 A double-declining balance method is a form of an accelerated
depreciation method in which the asset value is depreciated at twice
the rate it is done in the straight-line method.
Example
Suppose a business has bought a machine for $ 100,000. They have
estimated the useful life of the machine to be 8 years with a salvage
value of $ 11,000
Cost of the asset = $ 100,000
Salvage Value = $ 11,000
The useful life of the asset = 8 years
Depreciation rate = 1/useful life *100 = (1/8) * 100 = 12.5%
Double-declining balance formula = 2 x Cost of the asset x
Depreciation rate.
 Here, it will be 2 x 12.5% = 25%

Year 1 Depreciation = 100000 X 25% = 25,000

Year 2 Depreciation = 75,000 x 25% = 18,750
Unit of production method

The unit of production method is a method of depreciation in which

the depreciation of an asset is calculated using its actual usage and not
the passage of time
Example:
A textile company bought machinery for Rs 2,00,000 on the 1st of
January that has an approximate 10 years of useful life and about Rs
20,000 estimated residential value. The asset is sold by the firm at its
residential value during the end of 10th year. The expected production
units of the machinery are 15,000 during the course of its useful life.
The current production pattern of the machinery is:
Solution:

Annual Depreciation = Depreciable Value x Units produced during the year

Estimated total production
Depreciable Value = Original cost – Scrap value 
                                 = 2,00,000 - 20,000 
                                  = 1,80,000

Year 1-3 1,80,000*2000/15,000 = 24,000

Year 4-7 1,80,000*1500/15,000 = 18,000
Year 8-10 1,80,000*1000/15,000 = 12,000