UNIT - V

DEPRECIATION

DEPRECIATION
Depreciation is defined as the gradual
and
permanent decrease in the value of an
asset
from any cause.

Cause for Depreciation

Wear and Tear Result from friction.
Depletion Decrease value of assets (mines,oilwell)
Obsolescence loss due to change in demand (mobile, laptops)
Lapse of time The value of asset goes down whether utilized or not.

Reason for providing

Depreciation
To
To
To
To

know the correct profit

show the correct financial position
sell the asset in second hand
make replacement decision

METHODS OF DEPRICIATION
CALCULATION

STRAIGHT LINE METHOD

DIMINISING METHOD
SUM OF THE YEARS METHOD
SINKING FUND METHOD
SERVICE OUTPUT METHOD

STRAIGHT LINE METHOD

The depreciation is calculated on
original cost of
the assets and fixed amount is
charged as the
depreciation amount throughout the
lifetime of
an asset.

Let
P = first cost of the asset
F = salvage value of the asset
N = life of the asset
Bt = Book value of the asset at the end of the
period t.
Dt = Depreciation amount for the period t.
Formulae:
Dt = (P F)/N
Bt = Bt-1 - Dt
= P-t* ((P-F)/N)

Problem.1. A company purchased a machinery

for Rs.8000.The useful life of the machinery is
10
years and the estimated salvage value of the
machinery at the end of the lifetime is
Rs.800.Determine the depreciation charge and
the book value at the end of various year using
the straight line method.

Given..
P = Rs.8000
F = Rs.800
N = 10 years
To find..
Bt = Book value of the asset at the end of
the period t.
Dt = Depreciation amount for the period t.

Solution ..
Dt = (P F)/N = (8000 800 )/10
End of year
Depreciation ( D )
Book value
720
(t)
B =B D
t

t-1

- --

8000

720

7280

720

6560

720

5840

720

5120

720

4400

720

3680

720

2960

720

2240

720

1520

10

720

800

DIMINISING METHOD
Under this method the depreciation is
charged
at the fixed rate on decreasing the
balance every
Year.

Let
Let
P = first cost of the asset
F = salvage value of the asset
N = life of the asset
Bt = Book value of the asset at the end of the period t.
Dt = Depreciation amount for the period t.
K = A fixed percentage.
Formulae:
Dt = k * Bt-1
= K (1-K)t-1 * P
Bt = (1 K) *Bt-1
= (1 K)t * P

Problem.2. Calculate the depreciation

and book value for period 5 using the
declining balance method of
depreciation by assuming 0.2 for K
and Rs.1,20,000 for P and salvage
value Rs.10,000. The useful life of
the machinery is 10 years.

Given..
P = Rs.1,20,000
F = Rs.10,000
N = 10 years
K = 0.2
To find..
Bt = Book value of the asset at the end of the
period 5.
Dt = Depreciation amount for the period 5.

Solution..
Dt = K (1-K)t-1 * P
D5= 0.2 (1-0.2)5-1 * 120000
= Rs.9830.40
Bt = (1 K)t * P
B5= (1 0.2)5 * 120000
= Rs.39,321.60
Result.
D5 = Rs.9830.40
B5 = Rs.39,321.60