y A non cash expense that reduces the value of an asset

result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. y "Depreciation is the gradual permanent decrease in the value of an asset from any cause."

y y y y y

Original cost of the asset. Estimated working life of the asset. Estimated scrap value . The amount to be spent periodically for repairs and renewals. The possibility of the asset becoming obsolete.

line  Written down value method:  Annuity Method:  Sinking fund:

 Straight

 Revaluation

method  Sum of the year's digits method  Depletion method:  Insurance policy method:

Straight line
Under this method the expected life of the asset or the period during which a particular asset will render service is the calculated.The cost of the asset less scrap value, if any, at the end f its expected life is divided by the number of years of its expected life and each year a fixed amount is charged in accounts as depreciation. The amount chargeable in respect of depreciation under this method remains constant from year to year. This method is also know as straight line method because if a graph of the amounts of annual depreciation is drawn, it would be a straight line. Annual Depreciation = [(Cost of Assets - Scrap Value)/Estimated Life of Machinery]

Written down value method:

y

Under this method the asset is depreciated at fixed percentage calculated on the debit balance of the asset which is diminished year after year on account of depreciation.

Annuity Method
y

According to this method, the purchase of the asset concerned is considered an investment of capital, earning interest at certain rate. The cost of the asset and also interest thereon are written down annually by equal installments until the book value of the asset is reduced to nil or its bread up value at the end of its effective life. The annual charge to be made by way of depreciation is found out from annuity tables. The annual charge for depreciation will be credited to asset account and debited to depreciation account, while the interest will be debited to asset account and credited to interest account

Sinking fund
y

Under this method, a fund knows as depreciation fund or sinking fund is created. Each year the profit and loss account is debited and the fund account credited with a sum, which is so calculated that the annual sum credited to the fund account and accumulating throughout the life of the asset may be equal to the amount which would be required to replace the old asset. In order that ready funds may be available at the time of replacement of the asset an amount equal to that credited to the fund account is invested outside the business, generally in gilt-edged securities. The asset appears in the balance sheet year after year at its original cost while depreciation fund account appears on the liability side.

Insurance policy method

y

Insurance policy method is a slight

modification of the sinking fund method. Under this method the amount represented by the depreciation fund, instead of being used to buy securities, is paid to an insurance company as premium.The insurance company issues a policy promising to pay a lump sum at the end of the working life of the asset for its replacement on revaluation the value of an asset is found to have increased, it being of temporary nature not taken into account

Insurance policy method

y

As the name implies under revaluation method, the assets are valued at the end of each period so that the difference between the old value and the new value, which represents the actual depreciation can be charged against the profit and loss account. This method is mostly used in case of assets like bottles, horses, packages, loose tools, casks etc. On rare occasions when

Sum of the year's digits method

y

Sum of the Years' Digits Method an accelerated method of depreciation which is also based on the assumption that the loss in the value of the fixed asset will be greater during the earlier years and will go on decreasing gradually with the decrease in the life of such asset. The SYD is found by estimating an asset's useful life in years, then assessing consecutive numbers to each year, and totaling these numbers.

Depletion method:
Depletion method of depreciation is especially suited to mines, quarries, sand pits, etc. According to it the cost of the asset is divided by the total workable deposits. In this way, rate of depreciation per unit of output is ascertained. Depreciation in any particular year is charged on the basis of the output during that year. y The total cost of the asset less depreciations is divided by the expected life of the machine in terms of hours. Depreciation to be charged is ascertained by multiplying the hourly rate of depreciations by the number of hours the machine actually works during the year.
y