8

>>

>>

>>

>>

>>

>>

7
>>

>>

>>

>>

>>

>>

6
>>

>>

>>

>>

>>

>>

5
>>

>>

>>

>>

>>

>>

4
>>

>>

>>

>>

>>

>>

3
>>

>>

>>

>>

>>

>>

>>

>>

>>

>>

>>

>>

>>

>>

>>

>>

>>

>>

Presentation
start

>>

>>

>>

>>

>>

>>

Silent Prince

Depreciation:Gradual decrease in the value of an asset

is known as depreciation.
It has two types:1- Internal depreciation.
2- External depreciation.

Formula of Depreciation
Depreciation =

Cost of Asset
No of year

Internal Depreciation:Depreciation which occurs for

certain inherent normal causes, is
known as internal depreciation. Such
as wear and tear and depletion.
External Depreciation:Depreciation caused by some
external reasons is called external
depreciation. Such as obsolescence,
efflux of time and accident.

Causes of depreciation
Wear and Tear
Obsolescence

Wear and Tear:The change in the shape of an asset

due to use in the business is known as wear
and tear.

Obsolescence:The decrease in the value of an asset

due to new inventories, change in habit and
taste of people, improvement and change in
technology and fashion is known as
obsolescence.

Methods of depreciation
Uniform charge method
Diminishing method
Uniform charge method:In this case method of depreciation is charged on
uniform basses year after year.

Types of Uniform Charge

method
Straight line method
Depletion method
Machine rate method

Straight Line Method Of

Depreciation
Under this method depreciation of an
asset will be equal in each accounting
year, it is also known as straight line
method.

Formula of straight line

method
Depreciation=
value

Original cost of an asset- scrap

Estimated life

For percentage of depreciation:Depreciation

100
Depreciation
Original asset

Example of straight line method

Date

Assets

Depreciation

2000

10000rs

(1000025)/100
=2500
Balance of C/D 7500

2001

10000

10000

7500rs

(1000025)/100
=2500
Balance of C/D 5000

2002

7500

7500

5000rs

(1000025)/100
=2500
Balance of C/D 2500

2003

5000

5000

2500rs

(1000025)/100
=2500
Balance of C/D 0

2500

2500

AssetsDepreciation
100002500=7500

Depletion method or Production

output
method:Decrease in the value of wasting
asset is called depletion.
Wasting Assets:Assets whose value gradually reduces on account
of use and finally exhausts completely are called wasting
assets, e.g. mine, forest, machinery etc

Detail:In this method the charge of

depreciation
In respect of use of an asset will be
based on the following factors.
i.Total amount paid.
ii.Total estimated quality of output
available.

Natural Resources:
Cost Determination and
Depletion

P5

Step 1:
Depletion
Per Unit

Cost
Total Units of Capacity

Step 2:
Depletion
Expense

Depletion
Per Unit

Units Extracted
and Sold in
Period

8-26

P5

Depletion of Natural Resources

Apex Mining acquired a tract of land
containing ore deposits. Total costs of
acquisition and development were
$1,000,000 and Apex estimates the land
contained 40,000 tons of ore. During the
first year of operations Apex extracted
and sold 13,000 tons of ore.

8-27

P5

Depletion Expense

Step 1:
Depletion
Per Unit

$1,000,000 - $0
40,000 tons

$25 per ton

Step 2:
Depletion =
$25 per ton
Expense

13,000 Tons = $325,000

8-28

Machine hour rate method

This is also known as service hour
method. This method take into account
the running time of the asset for the
purpose of calculate depreciation.
Original cost of asset - Scrape value
Estimate life(in hour)

For Example

Machine hour rate= 10000-1000

10000
Machine hour rate

= 0.9/hour

Depreciation
Depreciation
Exercise (Machine hour rate)
($105,000 / 1,000 hours = $105 per hour)
Year
2007
2008
2009
2010
2011

Chapter
10-31

Hours
Used
200
150
250
300
100
1,000

x
x
x
x
x

Rate per
Hour
$105 =
105 =
105 =
105 =
105 =

Annual
Expense
$ 21,000
15,750
26,250
31,500
10,500
$ 105,000

Accum.
Deprec.
$ 21,000
36,750
63,000
94,500
105,000

Declining Method
Types of declining method.
1.Reducing installment method
2.Sum of Year digit method
3.Double declining method

Reducing Balance method

Under this method depreciation is
calculated on the book value.
It is also known as Diminishing
balance.
On next page you will see its example.

Book Value:Remaining life of an asset is

known as Book Value.
Asset Depriciation
1.100000 10%10000
90000
2.90000 10%9000 81000
3.81000 10%8100 72900
4.72900 10%7290 65610

Date

Assets

Depreciation

2010

100000rs

(10000010)/100
=10000
Balance of C/D 90000

2011

100000

100000

90000

(9000010)/100
=9000

Assets-Depreciation

Balance of C/D 81000

100000-10000=90000

2012

90000

90000

81000

(8100010)/100
=8100
Balance of C/D 72900

81000

81000

This method is on the pattern of

diminishing balance method the amount of
depreciation to be charged to the profit or
loss account under this method
depreciation decrease every year.

Formula of (SYD)

Depreciaton = Remaining life of asset(including current year) x

Original cost
Sum of All digit(Estimatted life)

Example
i. Cost of machinery
= Rs 10000
ii. Effective Working life = 3 year
iii. Depreciation
=3 year
1st year depreciation = (3 x 10000) /
1+2+3
= 5000
2nd year depreciation= (2x10000) / 6
= 3333
3rd year depreciation= (1x 10000) / 6
= 1667

Date

Assets

Depreciation

2010

10000rs

(100003)/6
=5000
Balance of C/D 5000

2011

10000

10000

5000

(100002)/6
=3333
Balance of C/D 1667

2012

5000

5000

1667

(100001)/6
=1667

1667

1667

Depreciation
Depreciation
Double-Declining-Balance
Decreasing annual depreciation expense over the
assets useful life.
Illustration 10-14
Declining-balance rate
is double the straightline rate.
Rate applied to book
value (cost less
accumulated
depreciation).
SO 3 Compute periodic depreciation using different methods.

Example
Cost of plant= 117900
Estimated life= 5year
Scarp value= 12900
Straight line
Depreciation= Original cost Scrap value
Estimated life
= 117900 Scrap value
5(year)

Depreciation
Depreciation
Exercise (Double-Declining Balance Method)
Year
2007
2008

Net
Bookvalue
$ 117,900
70,740

Rate per
Year
x
40% =
x
40% =

Annual
Expense
$ 47,160
28,296

Accum.
Deprec.
$ 47,160
75,456

2009

42,444

40%

16,978

92,434

2010
2011

25,466
15,280

x
x

40%
40%

=
=

10,186
2,380
$105,000

102,620
Plug
105,000

Plug

Thank You