CONCEPT

• Depreciation is the cost of lost usefulness or cost of

diminution of
service yield from a use of fixed assets.
• A permanent fall in value of fixed assets arising through
wear and tear from the use of those assets in business.
 Definition
“depreciation is a measure of the wearing out,
consumption or other loss of value of
depreciation arising from use, efflux ion of time
or obsolesance through technology and market
changes. Depreciation is allocated so as to
charge a fair proportion of the depreciable
amount in each accounting period during the
expected useful life of the asset. Depreciation
includes amortization of assets whose useful life
is predetermined.”
 Causes for depreciation
• Internal Causes: wear and tear, disuse ,
maintenance, change in production,
restriction of production, reduced demand,
technical progress & depletion.

• External Causes: obsolescence and efflux ion

of time.
 objectiv
• To calculate eproper profit.
• To show the assets its reasonable value.
• To maintain original monetary investment of the
asset intact.
• Provision of depreciation results in some
incidental advantage also.
• To provide for replacement of an asset.
• Depreciation is permitted to be deducted from
profits for tax purposes.
 How to calculate depreciation
Historical cost
or other Estimate Depreciable
d
amount
Residual
amount
substituted
for historical cost value

Estimated Depreciable
Depreciable
useful amount
amount
life
(years)
Depreciation methods
• Straight line method
• Declining balance method
• Sum of years digit method
• Inventory method
• Annuity method
• Depreciation fund method
• Machine hour (or) production unit method
• Depletion method
 Straight line method
• It is also called as fixed installment method
• Under this method, the same amount
of depreciationis charged every year
throughout the life of asset.
• The formula
( Cost − Residual Value ) x Rate of
● Depreciation per annum =
depreciation

( Cost − Residual Value )

● Depreciation per annum =
Useful Life
 Example for straight line method
ex:- On April 1st 2011 the machine was purchased at amount of
Rs.50,000. the estimated year of the machine was 5 years. Calculate
the depreciation on straight line basis. (Or) depreciate at 20% per
annum
Solution:
depreciation amount = ( Cost − Residual Value )/Useful Life
= (50,000-0)/5

= 10,000

Depreciation amount = ( Cost − Residual Value ) x Rate of %

= (50,000-0)*20%
= 50,000*20%
= 10,000
Depreciation on estimated life
• Depreciation for1st year = 50,000-10,000 =
40,000
• Depreciation for 2
3rdnd year
year==40,000-10,000
30,000-10,000==30,000
20,000
• Depreciation for 4th year = 20,000-10,000 = 10,000
• Depreciation for 5th year = 10,000-10,000= 0

Depreciation on percentage method

• Depreciation for1st year = 50,000-10,000 =
40,000
• Depreciation for 2
3rdnd year
year==40,000-10,000
30,000-10,000==30,000
20,000
• Depreciation for 4th year = 20,000-10,000 = 10,000
• Depreciation for 5th year = 10,000-10,000= 0
 DIMINISHING BALANCE METHOD
• Depreciation is changed according to a fixed
percentage
• It is also called as written down method
• The rate of depreciation remains constant in all
year after the first years amount was same as
straight line method
• After the year it changes every year
Example for Diminishing Balance Method
ex:- On April 1st 2011 the machine was purchased at amount of
Rs.50,000. the estimated year of the machine was 5 years. Calculate
the depreciation on straight line basis. (Or) depreciate at 10% per
annum at 5 years.
Solution:
Depreciation amount = ( Cost − Residual Value ) x Rate of %

Depreciation expense for different years

1st year = 50,000*20% = 5,000
2nd year = 45,000*10% = 4,500
year = 40,500*10% = 4,050
3rd
year = 36,450*10% = 3,645
year = 32,805*10% = 3,208.5
4th

th
Depreciation on Diminishing Balance Method
• Depreciation for1st year = 50,000 – 5,000 =
45,000
• Depreciation for 2nd year
year==45,000 - 4,500
40,500 – 4,050 =
= 36,450
40,500 year = 36,450 – 3,645 = 32,085
• Depreciation for 3rd
year = 32,085 – 3,209 = 28,876
• Depreciation for 4th
• Depreciation for 5th
 DOUBLE DECLINING BALANCE
METHOD
• It is defined as an accelerated method of depreciation is
a GAAP approved method for discounting the value
of
equipment as it ages. It depreciates a tangible asset using twice
the straight-line depreciation rate.

• Double declining balance method formula:-

Depreciation amount = ( Cost − Residual Value ) x Rate of %
x2
Example for Double declining
balance method
For example:- if you have an asset with a purchase price of
Rs.10,000 and a useful life of 5 years, then the straight-line
depreciation rate will be 20%.
Solution:-
Depreciation amount = ( Cost − Residual Value ) x Rate of
%x2
= 10,000 x 10% x 2
= 10,000 x 20%
= 2,000
 Depreciation expense for different years
• year = 10,000 x 20% = 2,000
1st
• 2nd year = 8,000 x 20% = 1,600
• rd year = 6,400 x 20% = 1,280
3
• year 5,120 x 20% =
• = 1,024
4th year = 4,096 x 20% =
819
 Depreciation on Double declining Balance Method
5th
• Depreciation for 1st year = 10,000 – 2,000 =
8,000 8,000 – 1,600 = 6,400
• Depreciation for 2nd year
year = =6,400 – 1280 = 5120
• Depreciation for 3rd year = 5,120 – 1,024 = 4,096
• Depreciation for 4th year = 4,096 - 819 =
• depreciation for 5th 3277
 SUM OF YEARS DIGITS METHOD
• It is one of the pattern in diminishing method
• It is charged under the profit and loss account
• Under this method depreciation value is decreasing every
year
• Formula:-
Sum of year Digit method depreciation =(Depreciable
Base)×
Remaining Useful Life/Sum of the Years' Digits
sum of years‘ digits = n(n+1)/2
 Example for syd method
Ex:- cost of machine was Rs.45,000, residual value of
machine was Rs.5,000, useful life of the machine was 4
years. depreciation on syd
Solution:-
Sum of years = n(n+1)/2
= 4(4+1)/2
= 10
Depreciation base = 45,000 – 5,000 = 40,000
Year Depreciable Depreciation Depreciation Accumulated
Base Factor Expense Depreciation

1 40,000 4/10 4/10 x 40,000 16,000

= 16,000

2 40,000 3/10 3/10 x 40,000 28,000

=12,000

3 40,000 2/10 2/10 x 40,000 36,000

= 8,000

4 40,000 1/10 1/10 x 40,000 40,000

= 4,000
 UNIT PRODUCTION DEPRECIATION
METHOD
• It is charged according to the actual usage of asset
• It is similar to the straight line method except the life
of the asset is estimated in terms of numbers
• It is very useful for natural resources company
• Formula:-

Depreciation = (Number of Units Produced × (Cost −

Salvage Value))/Life in Number of Units
Example:- A plant costing Rs.110 million was purchased on
April 1, 2010. The salvage value was estimated to be Rs.10
million. The expected production was 150 million units.
The plant was used to produce 15 million units till the year
ended December 31, 2010. Calculate the depreciation on
the plant for the year ended December 31, 2011.
Solution:

Depreciation = (Number of Units Produced × (Cost −

Salvage Value))/Life in Number of Units

Depreciation = (15/150) × (Rs.110 million - Rs.10 million) =

Rs.10 million
 Depletion
• It is an accounting concept
• It is mostly used in timber, mining and mineral
oil etc.,
• It requires matching principle
• Formula:-

depletion Expense = ((cost – salvage value) x

number of units extracted) / estimated number of
units
Example:- A mining company purchased a coal mine on Jan 1
20X5 for Rs.2,800,000. The estimated capacity of the mine is
1,750,000 tons of coal and the estimated salvage value is zero.
The company incurred additional Rs.50,000 on development of
mine for extraction purposes. They had extracted 210,000
tons of coal from the mine up to Jan 31, 20X5 and sold all but
13,000 tons of the coal extracted from the mine, with in Jan
20X5. Calculate the depletion expense on the mine for the
month ending Jan 31, 20X5.
Solution:-
depletion Expense = ((cost – salvage value) x number of units
extracted) / estimated number of units
Cost per ton = (28,00,000 + 50,000)/17,50,000
= Rs.1.62857
Total depletion mine = cost per ton x total units exacted
= Rs.1.62857 x 2,10,000
= Rs.3,42,000
Depletion expense = total depletion of mine – depletion
related to unsold extract
= 3,42,000 – (1.62857 x 14,000)
= 3,42,000 – 22,800
= 3,19,200