Saran raj S L
Chenthylathiban S K
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
Straight line method
Straight line method depreciates cost evenly through out the useful
life of the fixed asset.
Depreciation per annum = (Cost – Salvage value)
Salvage value – The estimated value that an asset will realize upon its sale
at the end of its useful life. Company
Cost of the asset
Less: salvage value
Years of estimated useful time (in yrs)
Depreciation = 10500 – 500
= Rs. 2000
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
Depreciation = depreciation base * remaining useful life
sum of year’s digits
Cost of the asset – Rs. 45000
Salvage value – Rs. 5000
Useful life – 4 years
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
◦ Depreciation per annum = (Net Book Value - Residual Value) x Rate%
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:
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.
borrowing amount – Rs. 100000
payment – monthly payment for 30 years
Write off is a reduction in the value of an asset or earnings by the
amount of an expense or loss.
- 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- or when inventory is obsolete,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
Also called as sinking fund or amortization fund
◦ 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
Annual depreciation charges = ((C-R)/((1+i)n-1)/i)
C – cost of asset
R – residual value
i – interest rate
n – no of years
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%)
= Rs. 3,619.50