Depreciation methods

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Depreciation and its methods with full explanation enjoy @Silent Prince@

Depreciation and its methods with full explanation enjoy @Silent Prince@

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  • 10. Silent Prince
  • 11. Depreciation:- Gradual decrease in the value of an asset is known as depreciation. It has two types:- 1- Internal depreciation. 2- External depreciation.
  • 12. Formula of Depreciation Depreciation = Cost of Asset No of year
  • 13. 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.
  • 14. Causes of depreciation • Wear and Tear • Obsolescence
  • 15. 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.
  • 16. 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.
  • 17. Types of Uniform Charge method • Straight line method • Depletion method • Machine rate method
  • 18. 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.
  • 19. Formula of straight line method Depreciation= Original cost of an asset- scrap value Estimated life For percentage of depreciation:- Depreciation × Depreciation × 100 Original asset
  • 20. Market price of an assets:- Scarp value of an asset:- Working Life of an asset:-
  • 21. Date Assets Depreciation 2000 10000rs (10000×25)/100 =2500 Balance of C/D 7500 10000 10000 2001 7500rs (10000×25)/100 =2500 Balance of C/D 5000 7500 7500 2002 5000rs (10000×25)/100 =2500 Balance of C/D 2500 5000 5000 2003 2500rs (10000×25)/100 =2500 Balance of C/D 0 2500 2500 Example of straight line method Assets-Depreciation 10000-2500=7500
  • 22. 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
  • 23. 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.
  • 24. Natural Resources: Cost Determination and Depletion Step 2: Depletion Expense = Depletion Per Unit × Units Extracted and Sold in Period Depletion Per Unit = Cost Total Units of Capacity Step 1: P5 8-26
  • 25. 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. Depletion of Natural ResourcesP5 8-27
  • 26. Step 2: Depletion Expense = $25 per ton × 13,000 Tons = $325,000 Step 1: Depletion Per Unit = $1,000,000 - $0 40,000 tons = $25 per ton Depletion Expense P5 8-28
  • 27. 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)
  • 28. For Example Machine hour rate= 10000-1000 10000 Machine hour rate = 0.9/hour
  • 29. Chapter 10-31 Hours Rate per Annual Accum. Year Used Hour Expense Deprec. 2007 200 x $105 = 21,000$ 21,000$ 2008 150 x 105 = 15,750 36,750 2009 250 x 105 = 26,250 63,000 2010 300 x 105 = 31,500 94,500 2011 100 x 105 = 10,500 105,000 1,000 105,000$ Depreciation Exercise (Machine hour rate) ($105,000 / 1,000 hours = $105 per hour)
  • 30. Declining Method Types of declining method. 1. Reducing installment method 2. Sum of Year digit method 3. Double declining method
  • 31. 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.
  • 32. 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
  • 33. Date Assets Depreciation 2010 100000rs (100000×10)/100 =10000 Balance of C/D 90000 100000 100000 2011 90000 (90000×10)/100 =9000 Balance of C/D 81000 90000 90000 2012 81000 (81000×10)/100 =8100 Balance of C/D 72900 81000 81000 Assets-Depreciation 100000-10000=90000
  • 34. 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.
  • 35. Formula of (SYD) Depreciaton = Remaining life of asset(including current year) x Original cost Sum of All digit(Estimatted life)
  • 36. 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
  • 37. Date Assets Depreciation 2010 10000rs (10000×3)/6 =5000 Balance of C/D 5000 10000 10000 2011 5000 (10000×2)/6 =3333 Balance of C/D 1667 5000 5000 2012 1667 (10000×1)/6 =1667 1667 1667
  • 38. Decreasing annual depreciation expense over the asset’s useful life. Double-Declining-Balance Depreciation SO 3 Compute periodic depreciation using different methods. Declining-balance rate is double the straight- line rate. Rate applied to book value (cost less accumulated depreciation). Illustration 10-14
  • 39. 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)
  • 40. Net Rate per Annual Accum. Year Bookvalue Year Expense Deprec. 2007 117,900$ x 40% = 47,160$ 47,160$ 2008 70,740 x 40% = 28,296 75,456 2009 42,444 x 40% = 16,978 92,434 2010 25,466 x 40% = 10,186 102,620 2011 15,280 x 40% = 2,380 105,000 105,000$ Depreciation Exercise (Double-Declining Balance Method) Plug Plug
  • 41. Thank You