Depreciation

types of depreciation on assets

1. DEPRECIATION BY Y.MADHU VENKATA SAINATH 171FC01085 [email protected]

2. CONTENTS Concepts Definition Objectives Causes How to calculate Depreciation Depreciation Methods

3. 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.

4. 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.”

5. 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.

6. objective To calculate proper 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.

7. How to calculate depreciation Historical cost or other amount substituted for historical cost Estimated Residual value Depreciable amount Depreciable amount Estimated useful life (years) Depreciable amount

8. 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

9. Straight line method It is also called as fixed installment method Under this method, the same amount of depreciation is charged every year throughout the life of asset. The formula ●  Depreciation per annum = ( Cost   −   Residual Value )   x   Rate of depreciation ● Depreciation per annum = (  Cost    −    Residual Value  ) Useful Life

10. Example for straight line method ex:- On April 1 st 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

11. D epreciation on estimated life Depreciation for1 st year = 50,000-10,000 = 40,000 Depreciation for 2 nd year = 40,000-10,000 = 30,000 Depreciation for 3 rd year = 30,000-10,000 = 20,000 Depreciation for 4 th year = 20,000-10,000 = 10,000 Depreciation for 5 th year = 10,000-10,000= 0 Depreciation on percentage method Depreciation for1 st year = 50,000-10,000 = 40,000 Depreciation for 2 nd year = 40,000-10,000 = 30,000 Depreciation for 3 rd year = 30,000-10,000 = 20,000 Depreciation for 4 th year = 20,000-10,000 = 10,000 Depreciation for 5 th year = 10,000-10,000= 0

12. 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

13. Example for Diminishing B alance M ethod ex:- On April 1 st 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 R ate of % Depreciation expense for different years 1 st year = 50,000*20% = 5,000 2 nd year = 45,000*10% = 4,500 3 rd year = 40,500*10% = 4,050 4 th year = 36,450*10% = 3,645 5 th year = 32,805*10% = 3,208.5

14. Depreciation on Diminishing Balance M ethod Depreciation for1 st year = 50,000 – 5,000 = 45,000 Depreciation for 2 nd year = 45,000 - 4,500 = 40,500 Depreciation for 3 rd year = 40,500 – 4,050 = 36,450 Depreciation for 4 th year = 36,450 – 3,645 = 32,085 Depreciation for 5 th year = 32,085 – 3,209 = 28,876

15. 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 % x 2

16. 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 % x 2 = 10,000 x 10% x 2 = 10,000 x 20% = 2,000

17. Depreciation expense for different years 1 st year = 10,000 x 20% = 2,000 2 nd year = 8,000 x 20% = 1,600 3 rd year = 6,400 x 20% = 1,280 4 th year = 5,120 x 20% = 1,024 5 th year = 4,096 x 20% = 819 Depreciation on Double declining Balance Method Depreciation for 1 st year = 10,000 – 2,000 = 8,000 Depreciation for 2 nd year = 8,000 – 1,600 = 6,400 Depreciation for 3 rd year = 6,400 – 1280 = 5120 Depreciation for 4 th year = 5,120 – 1,024 = 4,096 depreciation for 5 th year = 4,096 - 819 = 3277

18. 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

19. 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

20. Year Depreciable Base Depreciation Factor Depreciation Expense Accumulated 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 =12,000 28,000 3 40,000 2/10 2/10 x 40,000 = 8,000 36,000 4 40,000 1/10 1/10 x 40,000 = 4,000 40,000

21. 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

22. 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

23. 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

24. 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

25. 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

26. Thank you