(c) 2001 Contemporary Engineering Economics

1
DEPRECIATION
PRESENTED BY:

TAHSEEN ULLAH
Class No: 01
BBA(H) 5th semester
ABDUL WALI KHAN UNIVERSITY
MARDAN (PABBI CAMPUS...
Depreciation
Depreciation: represents the
systematic allocation of the cost
of a capital asset over a period of
time for f...
What Can Be Depreciated?
A qualifying asset for depreciation must satisfy all these
conditions:

 should be used in busin...
Types of Depreciation
Book Depreciation
Tax Depreciation
Book Depreciation
 Book Depreciation is provided as per the
prevailing accounting standards and the
necessary law of land...
Tax Depreciation
 Tax Depreciation is provided as per the
prevailing taxation laws.
Methods to Calculate Depreciation


Straight-Line Method



Declining Balance Method



MACRS Method
Required Factors in Calculating Asset
Depreciation
 Useful life of asset

 Residual value
 Cost basis

 Method of depr...
1. Straight-Line (SL) Method
Principle
A fixed asset provides its service in a uniform
fashion over its life
Formula
Annua...
EXAMPLE
(Straight-Line Method)
Cost of machinery = $45,000
Residual value = $5,000
Useful life = 5 years.
Calculate annual...
Example - (Straight-Line Method)

Annual
Depreciation
expense

1

2

3

Years

4

5
2. Declining Balance Method
Principle
A fixed asset provides its service in a decreasing fashion.
The book value is reduce...
EXAMPLE
( Declining Balance Method)
Cost of machinery = $70,000
Residual value = $5000
Useful life = 5 years
Cost of annua...
Example – Declining Balance Method

Annual
Depreciation
expense

1

2

3

Years

4

5
3. MACRS Method
Principle
An asset has a fixed life according to the category in
which it falls.
The residual value is alw...
MACRS Schedule
R e c o ve ry
Year
1
2
3
4
5
6
7
8

P ro p e rty C la s s
3 -Y e a r
5 -Y e a r
3 3 .3 3 %
2 0 .0 0 %
4 4 ....
EXAMPLE
(MACRS Method)
Cost of tractor = Rs. 30,000
Cost of annual Depreciation?
Year

Computation

Depreciation Accumulat...
Depreciation 130220175802-phpapp01 (1)
Depreciation 130220175802-phpapp01 (1)
Depreciation 130220175802-phpapp01 (1)
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Depreciation 130220175802-phpapp01 (1)

  1. 1. (c) 2001 Contemporary Engineering Economics 1
  2. 2. DEPRECIATION PRESENTED BY: TAHSEEN ULLAH Class No: 01 BBA(H) 5th semester ABDUL WALI KHAN UNIVERSITY MARDAN (PABBI CAMPUS)
  3. 3. Depreciation Depreciation: represents the systematic allocation of the cost of a capital asset over a period of time for financial reporting purposes, tax purposes, or both.
  4. 4. What Can Be Depreciated? A qualifying asset for depreciation must satisfy all these conditions:  should be used in business  should have a definite useful life and a life longer than 1 year  must wear out, become obsolete or lose value
  5. 5. Types of Depreciation Book Depreciation Tax Depreciation
  6. 6. Book Depreciation  Book Depreciation is provided as per the prevailing accounting standards and the necessary law of land.
  7. 7. Tax Depreciation  Tax Depreciation is provided as per the prevailing taxation laws.
  8. 8. Methods to Calculate Depreciation  Straight-Line Method  Declining Balance Method  MACRS Method
  9. 9. Required Factors in Calculating Asset Depreciation  Useful life of asset  Residual value  Cost basis  Method of depreciation
  10. 10. 1. Straight-Line (SL) Method Principle A fixed asset provides its service in a uniform fashion over its life Formula Annual Depreciation = cost – residual value useful life
  11. 11. EXAMPLE (Straight-Line Method) Cost of machinery = $45,000 Residual value = $5,000 Useful life = 5 years. Calculate annual cost of depreciation? Year Computation Depreciation Expense Accumulated Depreciation Book Value $45,000 First (45,000-5,000)/5 $8,000 $8,000 37,000 Second (45,000-5,000)/5 8,000 16,000 29,000 Third (45,000-5,000)/5 8,000 24,000 21,000 Fourth (45,000-5,000)/5 8,000 32,000 13,000 Fifth (45,000-5,000)/5 8,000 40,000 5,000 Total 40,000
  12. 12. Example - (Straight-Line Method) Annual Depreciation expense 1 2 3 Years 4 5
  13. 13. 2. Declining Balance Method Principle A fixed asset provides its service in a decreasing fashion. The book value is reduced by a fixed percentage each year. Formula Annual Depreciation = Depreciation rate * Book value at start of year
  14. 14. EXAMPLE ( Declining Balance Method) Cost of machinery = $70,000 Residual value = $5000 Useful life = 5 years Cost of annual Depreciation? Year Computation DBM=100% 2 5years DBM= 40% Depreciation Expense Accumulated Depreciation Book Value $70,000 First $70,000 x 40% $28,000 $28,000 42,000 Second 42,000 x 40% 16,800 44,800 25,200 Third 25,200 x 40% 10,080 54,880 15,120 Fourth 15,120 x 40% 6,048 60,928 9,072 Fifth 9,072-$5,000 4,072 65,000 5,000 Total 65,000
  15. 15. Example – Declining Balance Method Annual Depreciation expense 1 2 3 Years 4 5
  16. 16. 3. MACRS Method Principle An asset has a fixed life according to the category in which it falls. The residual value is always zero. Formula Annual Depreciation = cost x appropriate MACRS % rate
  17. 17. MACRS Schedule R e c o ve ry Year 1 2 3 4 5 6 7 8 P ro p e rty C la s s 3 -Y e a r 5 -Y e a r 3 3 .3 3 % 2 0 .0 0 % 4 4 .4 5 3 2 .0 0 1 4 .8 1 1 9 .2 0 7 .4 1 1 1 .5 2 1 1 .5 2 5 .7 6 7 -Y e a r 1 4 .2 9 % 2 4 .4 9 1 7 .4 9 1 2 .4 9 8 .9 3 8 .9 2 8 .9 3 4 .4 6
  18. 18. EXAMPLE (MACRS Method) Cost of tractor = Rs. 30,000 Cost of annual Depreciation? Year Computation Depreciation Accumulated Expense Depreciation Book Value $30,000 First 33.33% x 30,000 9,999 9,999 20,001 Second 44.45% x 30,000 13,335 23,334 6,666 Third 14.81% x 30,000 4,443 27,777 2,223 Fourth 7.41% x 30,000 2,223 30,000 0

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