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# Depreciation & Amortisation

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### Depreciation & Amortisation

1. 1. By, Saran raj S L Chenthylathiban S K Jeeviga J Preethy S Manisha Susan
2. 2.  DEFINITION Depreciation is a non – cash expense that reduces the value of an asset over a period of time  Reason for asset depreciation ◦ Wear and tear of machinery ◦ Obsolescence – value gets depreciated due to replacement of newer models  Methods for calculating depreciation ◦ Straight line method ◦ Sum of years depreciation ◦ Declining balance calculation
3. 3.  Straight line method Straight line method depreciates cost evenly through out the useful life of the fixed asset.  Formula Depreciation per annum = (Cost – Salvage value) Useful life  Salvage value – The estimated value that an asset will realize upon its sale at the end of its useful life. Company
4. 4.  Example Cost of the asset 10500 Less: salvage value 500 Depreciable cost 10000 Years of estimated useful time (in yrs) 5 Depreciation = 10500 – 500 5 = Rs. 2000
5. 5.  Sum of year’s method ◦ Accelerated depreciation technique ◦ based on the assumption that assets are more productive when they are new and productivity decreases with time  Formula Depreciation = depreciation base * remaining useful life sum of year’s digits  Example Cost of the asset – Rs. 45000 Salvage value – Rs. 5000 Useful life – 4 years
6. 6.  Calculation Year Depreciation base (Rs) Depreciation Depreciation factor expense Accumulated depreciation 1 40000 4/10 16000 16000 2 40000 3/10 12000 28000 3 40000 2/10 8000 36000 4 40000 1/10 4000 40000 Depreciation factor = n(n+1) 2 = 4*5 2 = 10
7. 7.  Reducing balance method ◦ Reducing Balance Method charges depreciation at a higher rate in the earlier years of an asset. ◦ The amount of depreciation reduces as the life of the asset progresses. ◦ Depreciation under reducing balance method may be calculated as follows: ◦ Depreciation per annum = (Net Book Value - Residual Value) x Rate%
8. 8.  Example o o o o o An asset has a useful life of 3 years. Cost of the asset is \$2,000. Residual Value is \$500. Rate of depreciation is 50%. Depreciation expense for the three years will be as follows:
9. 9.     Definition Amortization is known as the paying off of debt in regular instalments over a period of time. Amortization is also known as the deduction of capital expenses over a specific period of time (usually over the asset's life). Measures the consumption of the value of intangible assets, such as a patent or a copyright. Example borrowing amount – Rs. 100000 payment – monthly payment for 30 years
10. 10.    Write off is a reduction in the value of an asset or earnings by the amount of an expense or loss. For example: - when an account receivable cannot be collected, - or when inventory is obsolete, - when there is no longer any use for a fixed asset, - or when an employee leaves the company and is not willing to pay the company back for a pay advance. The general concept is to credit the asset account and debit an expense account.
11. 11.  Also called as sinking fund or amortization fund  Definition ◦ A fund set up by a company to provide money to buy new fixed assets.  ◦ Every year the company invest certain amount that is equal to existing asset’s depreciation value ◦ This facilitates the company to use the money to buy new assets Formula Annual depreciation charges = ((C-R)/((1+i)n-1)/i) C – cost of asset R – residual value i – interest rate n – no of years
12. 12.  Example An asset has Rs.21,000 of original cost, Rs.1,000 of residual value, and 5 year of useful life. The annual interest for money earned is 5%. Depreciation charge = ( 21,000 - 1,000)/((1+5%)5 - 1)/5%) = 20,000/5,52563 = Rs. 3,619.50  Depreciation schedule
13. 13.            http://www.investopedia.com/articles/fundamental/04/090804.asp http://accounting-simplified.com/financial/fixed-assets/depreciationmethods/straight-line.html http://www.accountingcoach.com/online-accounting-course/11Xpg01.html http://accounting-simplified.com/financial/fixed-assets/depreciationmethods/declining-balance.html http://www.investopedia.com/terms/a/amortization.asp http://banking.about.com/od/loans/a/amortization_calculations.htm http://www.investopedia.com/terms/w/write-off.asp http://www.accountingtools.com/dictionary-write-off http://www.investopedia.com/terms/s/sinking-fund-method.asp http://www.accountingexplanation.com/sinking_fund_method_of_deprecia tion.htm http://www.varieart.com/article272-Calculating-Depreciation-Using-theSinking-Fund-or-Interest-Computing-Method