“In the Name of Allah, the Most Beneficent,

the Most Merciful”

Methods of Calculating
Depreciation Charges
 Questions 7
• A company, which makes up its financial statements annually to 31 December, provides for
depreciation of its machinery at the rate of 15 per cent per annum using the reducing balance
method. On 31 December 20X8, the machinery consisted of three items purchased as shown:
• On 1 January 20X6 Machine A Cost 2,000
• On 1 September 20X7 Machine B Cost 4,000
• On 1 May 20X8 Machine C Cost 3,000

• Required: Your calculations showing the depreciation provision for the year 20X8.
 A B C
Bought 01.01.2016 2,000
2016 Depreciation 15% * 2,000 (300)
1,700
Bought 01.09.2017 4,000
2017 Depreciation 15% * 1,700 (255)
Depreciation 15% * 4 months (200)
1,445 3,800
Bought 01.05.2018 3,000
Depreciation 15% * 1,445 (217)
Depreciation 15% * 3,800 (570)
Depreciation 15% * 8 months (300)
1,228 3,230 2,700

• 2018 Total Depreciation Provision = 217 + 570 + 300 = 1,087

 Questions 11
• Black and Blue Ltd depreciates its forklift trucks using a reducing balance rate of 30 per cent.
Its accounting year end is 30 September. On 30 September 20X6, it owned four forklift
trucks:
• Purchased on 1 January 20X3 for £2,400
• Purchased on 1 May 20X4 for £2,500
• Purchased on 1 October 20X4 for £3,200
• Purchased on 1 April 20X6 for £3,600

• Required: Calculate the depreciation provision for the year ending 30 September 20X6.
 A B C D
Bought 01.01.2013 2,400
2013 Depreciation 30% * 9 months (540)
1,860
Bought 01.05.2014 2,500
2014 Depreciation 30% * 1,860 (558)
Depreciation 30% * 5 months (313)
1,302 2,187
Bought 01.10.2014 3,200
2015 Depreciation 30% * 1,302 (391)
Depreciation 30% * 2,187 (656)
Depreciation 30% * 3,200 (960)
911 1,531 2,240
 A B C D

911 1,531 2,240

Bought 01.04.2016 3,600

Depreciation 30% * 911 (274)

Depreciation 30% * 1,531 (460)

Depreciation 30% * 2,240 (672)

Depreciation 30% * 6 months (540)

576 980 1,450 2,790

• 2016 Total Depreciation Provision = 274 + 460 + 672 + 540 = 1,946

 Questions 1

• Cost of note book PC = £2,600

• Useful number of years = 4
• Scrap value = £200

• Depreciation = (Cost – Estimated disposal value) / Number of expected years of use

= £2,600 - £200 / 4
= £600
 Questions 2

• A machine costs £8,000. It will be kept for five years, and then sold for an
estimated figure of £2,400. Show the calculations of the figures for
depreciation (to nearest £) for each of the five years using (a) the straight
line method, (b) the reducing balance method, for this method using a
depreciation rate of 20 per cent.
 Questions 1

• Cost of note book PC = £8,000

• Useful number of years = 5
• Scrap value = £2,400

• Depreciation = (Cost – Estimated disposal value) / Number of expected years of use

= £8,000 - £2,400 / 5
= £1,120
 Questions 1
Straight Line Reducing Balance
£ £
Cost 8,000 2,600
Depreciation: Year 1 (1,120) 45 % of 2,600 1,170
2,000 1,430
Depreciation: Year 2 (1,120) 45 % of 1,430 644
1,400 786
Depreciation: Year 3 (1,120) 45 % of 786 354
800 432
Depreciation: Year 4 (1,120) 45 % of 432 194
Disposal value 200 238
 Methods of calculating Depreciation

• Straight line method:

Depreciation = (Cost – Estimated disposal value) / Number of expected
years of use
 Methods of calculating Depreciation
• Reducing balance method or Diminishing balance method:
A fixed percentage for depreciation is deducted from the cost in the first year. In the
second year and later years the same percentage is taken of the reduced balance (cost
less depreciation already charged)
 Methods of calculating Depreciation
• If a machine is bought for $10,000 and depreciation is to be charged at 20 per cent, the calculations will be as;

Initial Cost 10,000

First year Depreciation 20% of 10,000 (2,000)
Remaining Balance 8,000
Second year Depreciation 20% of 8,000 (1,600)
Remaining Balance 6,400
Third year Depreciation 20% of 6,400 (1,280)
Cost not yet apportioned 5,120
 Choice of Method

• Spread the total cost of a non current asset over the time in which it is to
be used.
• Allocation of cost in accordance with the proportion of the overall
economic benefit.
 Choice of Method

• Straight Line Method:

• Operate faster and low maintenance cost
Equal charge for Equal charge for
depreciation depreciation
Will tend to be fairly
+ +
equal to
Equal charge for Equal charge for
maintenance maintenance
 Choice of Method

• Reducing Balance Method:

Higher charge for Lower charge for

depreciation depreciation
Will tend to be fairly
+ +
equal to
Lower charge for Higher charge for
maintenance maintenance