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    Depreciation

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    Depreciation

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    2 views13 pages

    Depreciation

    Uploaded by

    smpmnv5429

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    Depreciation

     Is a term used in accounting, economics and finance to


    spread the cost of an asset over the span of several
    years.
     In simple words we can say that depreciation is the
    reduction in the value of an asset due to usage,
    passage of time, wear and tear, technological
    outdating or obsolescence, depletion or other such
    factors.
     In accounting, depreciation is a term used to
    describe any method of attributing the historical or
    purchase cost of an asset across its useful life,
    roughly corresponding to normal wear and tear
    Companies need to report depreciation accurately in its
    financial statements in order to achieve two main objectives:

    to match its expenses with the income


    generated by means of those expenses.
    to ensure that the asset values in the
    balance sheet are not overstated.

    An asset acquired in Year 1 is unlikely to be


    worth the same amount in Year 5.
    Salvage value
    is the estimated value of an asset at the end of
    its useful life. In accounting, the salvage value
    of an asset is its remaining value after
    depreciation.
    This is also known as residual value or scrap
    value. It is the net cash inflow that occurs when
    the asset is liquefied at the end of its life.
    Salvage value can be negative if the residual
    asset requires special treatment to terminate—
    for example, used nuclear materials.
    Methods of depreciation
    Straight-linedepreciation
    Declining-Balance Method
    Activity depreciation
    Sum-of-Years' Digits Method
    Units-of-Production Depreciation
    Method
    Straight-line depreciation
    Straight-line depreciation is the simplest
    and most often used technique, in which
    the company estimates the salvage value
    of the asset at the end of the period
    during which it will be used to generate
    revenues (useful life), and will expense a
    portion of original cost in equal
    increments over that period. The salvage
    value is an estimate of the value of the
    asset at the time it will be sold or disposed
    of; it may be zero. Salvage value is scrap
    value, by another name.
    Annual depreciation expense =( Cost of fixed asset – scrap
    value)/life spam (years)
    For example, a vehicle that depreciates
    over 5 years, is purchased at a cost of
    US$17,000, and will have a salvage value
    of US$2000, will depreciate at US$3,000
    per year: ($17,000 - $2,000)/ 5 years =
    $3,000 annual straight-line depreciation
    expense. In other words, it is the
    depreciable cost of the asset divided by
    the number of years of its useful life.
    This table illustrates the straight-line
    method of depreciation. Book value at the
    beginning of the first year of depreciation
    is the original cost of the asset. At any
    time book value equals original cost minus
    accumulated depreciation.
    Book Value = Original Cost -
    Accumulated Depreciation
    Book value at the end of year becomes
    book value at the beginning of next year.
    The asset is depreciated until the book
    value equals scrap value.
    Book Value - Depreciation Accumulated Book Value -
    Beginning of Year Expense Depreciation End of Year

    $17,000 (Original Cost) $3,000 $3,000 $14,000

    $14,000 $3,000 $6,000 $11,000

    $11,000 $3,000 $9,000 $8,000

    $8,000 $3,000 $12,000 $5,000

    $5,000 $3,000 $15,000 $2,000 (Scrap Value)


    Declining-Balance Method
    Depreciation methods that provide for a
    higher depreciation charge in the first year
    of an asset's life and gradually decreasing
    charges in subsequent years are called
    accelerated depreciation methods.
    This may be a more realistic reflection of
    an asset's actual expected benefit from
    the use of the asset: many assets are most
    useful when they are new. One popular
    accelerated method is
    The declining-balance method. Under
    this method the Book Value is multiplied
    by a fixed rate.
    Annual Depreciation = Depreciation
    Rate * Book Value at Beginning of
    Year
    The most common rate used is double the
    straight-line rate. For this reason, this
    technique is referred to as the double-
    declining-balance method.
    To illustrate, suppose a business has an asset with $4,000 Original
    Cost, $100 Salvage Value, and 5 years useful life. First, calculate
    straight-line depreciation rate. Since the asset has 5 years useful
    life, the straight-line depreciation rate equals (100% / 5) = 20% per
    year. With double-declining-balance method, as the name suggests,
    double that rate, or 40% depreciation rate is used.

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