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Understanding Depreciation Methods

The document discusses various methods of depreciation, including definitions, causes, and calculation methods such as Straight Line, Depletion, Machine Hour Rate, Diminishing Balance, Sum of Digits, Double Declining Balance, Group Depreciation, Sinking Fund, and Annuity methods. It provides examples and formulas for calculating depreciation based on different scenarios. The document emphasizes the importance of understanding asset value reduction over time due to factors like wear and tear, obsolescence, and accidents.

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8 views23 pages

Understanding Depreciation Methods

The document discusses various methods of depreciation, including definitions, causes, and calculation methods such as Straight Line, Depletion, Machine Hour Rate, Diminishing Balance, Sum of Digits, Double Declining Balance, Group Depreciation, Sinking Fund, and Annuity methods. It provides examples and formulas for calculating depreciation based on different scenarios. The document emphasizes the importance of understanding asset value reduction over time due to factors like wear and tear, obsolescence, and accidents.

Uploaded by

student -1
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd

Depreciation

Definition and Causes


• Permanent and continuous diminution in the
quality or value of the asset.
Causes
[Link] and Tear
[Link]-coal mines
[Link]-computers
[Link] of time-Leaseholds
[Link]
Straight Line Method
Depreciation is charged evenly every year
throughout the effective life of the asset.
Depreciation = Original cost — Scrap value
life of the Asset
Scarp value or Residual value the estimated
cost that a fixed asset can be sold for
after factoring in full depreciation.
Problem 1
Problem 2
A business purchases a machine for $60,000. It
has an estimated salvage value of $10,000 and a
useful life of five years.
Depletion Method or Output method
• Based on the output produced.
• Suitable for coal mines.
• Depreciation =Output*Rate per unit
Problem 3
Machine hour rate method
• Depreciation charged based on the numbers
of hours used.
Problem 4:
Cost of the machine :Rs.50000
Estimated Life in hours: 25000 hrs
Run time of the machine :1st year :15000 hrs and
2nd year 10000 hrs
Calculate the depreciation value
Solution
• Depreciation per hour=50000/25000=Rs.2
• 1st year =15000*2=Rs.30,000
• 2nd year=10000*2=Rs.20,000
Diminishing Balance value or Written Down
value method
• Depreciation value is charged at a fixed
percentage of the book value
To find the depreciation percentage
Problem 4
Sum of digits method or Accelerated
Depreciation method
• Based on the total number of years .More on
initial years ,less next
• IF n=5,then
Sum of digits= {n(n+1)}/2,so 15
Formula
Problem 5
Double Declining balance method
• Double the straight line rate of depreciation
Group Depreciation Method
• All homogenous assets having the same life
are grouped together as a single category and
a fixed depreciation amount is charged for
each category
Sinking Fund Method
Depreciation provided every year will be
invested outside. Investment with interest
will be equal to the original value at the end
of the life.
Annuity Method
• Charged by considering original investment
and interest on it.
Problem

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