DEPRECIATION

ACCOUNTING 101 PRESENTATION

PRESENTED BY: HIKMATULLAH , UMAR KHALID, SUKAINA RAZA,
HAFIZ MUHAMMAD MUQSIT, ABDUL WASAY

DATE OF PRESENTATION: 28 JANUARY-

2022, FRIDAY.
What is depreciation in
ACCOUNTING?
 Depreciation is the systematic reduction of the recorded cost of
a fixed asset. Examples of fixed assets that can be depreciated
are buildings, furniture, and office equipment. The only
exception is land, which is not depreciated (since land is not
depleted over time, with the exception of natural resources).
 An example of Depreciation – If a delivery truck is purchased
by a company with a cost of Rs. 100,000 and the expected usage
of the truck are 5 years, the business might depreciate the asset
under depreciation expense as Rs. 20,000 every year for a
period of 5 years.
How to calculate
depreciation in
small businesses?
There are three methods
commonly used to calculate
depreciation. These are:
1. Straight-line method
2. Unit of production method
( Reducing Balance Method)
3. Double-declining balance
method
 We will be talking about two main
methods of calculating depreciation:

STRAIGHT LINE METHODREDUCING BALANCE

METHOD
 Straight line 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 $25,000 with an estimated useful
life of 8 years and a $0 salvage value. The depreciation expense per year Depreciation Expense =
for this equipment would be as follows: ($25,000 – $0) / 8 = $3,125 per
year
EXAMPLE 2:
JOURNAL ENTRY FOR
STRAIGHTLINE METHOD:
REDUCING BALANCE METHOD

 The declining balance method is an accelerated depreciation system of recording larger

depreciation expenses during the earlier years of an asset’s useful life and recording
smaller depreciation expenses during the asset's later years.

 KEY TAKEAWAYS
1. In accounting, the declining balance method is an accelerated depreciation system of
recording larger depreciation expenses during the earlier years of an asset’s useful life
while recording smaller depreciation during its later years.
2. This technique is useful for recording the depreciation of computers, cell phones, and
other high-technology products that rapidly become obsolete.
3. The declining balance technique represents the opposite of the straight-line
depreciation method, which is more suitable for assets whose book value steadily drops
over time.
 Calculating Reducing Balance Method.

Example:
Let’s say you buy a computer server for your business for $25,000; you assume that there’s no
salvage value. You want to use the 200% reducing-balance formula, and to depreciate this system
over two years.

1. For your first year:

$25,000 / 5 (years) = $5,000

$5,000 x 200% = $10,000
Your depreciation deduction for the first year would be $10,000.

2. For your second year:

$25,000 - $10,000 = $15,000 (this is now the book value of your asset)
$15,000 / 5 = $3,000
$3,000 x 200% = $6,000
Your depreciation deduction for the second year would be $6,000.
 what is asset disposal?
Asset disposal is the removal of a long-term asset from the
company’s accounting records. It is an important concept because
capital assets are essential to successful business operations.
Moreover, proper accounting of the disposal of an asset is critical
to maintaining updated and clean accounting records.
The asset disposal may be a result of several events:
• An asset is fully depreciated and must be disposed of.
• An asset is sold because it is no longer useful or needed.
• An asset must be removed from the books due to unforeseen
circumstances (e.g., theft).
Example
• Motors Inc. owns a machinery asset on its
balance sheet worth $3,000.
• Motors Inc. estimated the machinery’s
useful life to be three years. The annual
depreciation expense is $1,000. At the end
of the third year, the machinery is
depreciated, and the asset must be
disposed of. The machinery is sold for
$500
“to this end, the greatest Asset of an
institute is a teacher’s personality.”
Thankyou Sir Asghar for being Our
mentor throughout this semester.
REGARDS:
HAFIZ MUHAMMAD MUQSIT
SUKAINA RAZA, UMAR KHALID, HIKMATULLAH, ABDUL WASAY