Brief Introduction of Depreciation

1. DEPRECIATION
Lecture No. 1
Presented by:-
Syed Shabbar Abbas Naqvi
Lecturer
Govt. College Of Technology
Jhang, Punjab, Pakistan

2. DEPRECIATION
• It is decrease in value of physical properties with the passage of time and use.
0
1
2
3
4
5
6
Year 1 Year 2 Year 3 Year 4 Year 5
VALUE
TIME
Depreciation
Gradual decrease
in value over
passage of time

3. DEPRECIATION
• Depreciation can be termed as…
• Operational cost OR
• Used value of an asset in a specific time period. OR
• Permanent, continual and gradual shrinkage in book value of as asset.

4. Physical Depreciation: physical decay
Economic Depreciation : outdated technology
Accounting Depreciation: fall in worth of an asset
1.
2.
3.
Typesof
Depreciation

5. Causes of
Depreciation
Physical
Due to
accident
Due to
time factor
Due to
deferred
maintenan
ce
Monetary
Technolog
ical
Due to
depletion
Functional
CAUSES OF DEPRECIATION

6. 1. PHYSICAL DEPRECIATION
• It is the result of deterioration of an asset due to age and wear & tear. It results
from use, decay and the action of the elements.
• It is a constant factor. It begins as soon as an asset is exposed to the action of the
elements or is put into use.

7. 1. PHYSICAL DEPRECIATION
• It can be explained as…
• Deterioration due to action of elements
• Corrosion of pipes
• Rotting of timber
• Chemical decomposition
• Wear and tear charges
• Physical decay

8. 2. FUNCTIONAL DEPRECIATION
• It is the decrease in value of an asset provided as a result of lack of
adaptation to function.
• It is the reduction of usefulness or desirability of an asset because of an
outdated design feature that cannot be easily changed.
• It can also be related to upgradation of need. e.g. functions requirement from
any machinery/structure more than its capacity can lead to depreciation of
that.

9. 3. TECHNOLOGICAL DEPRECIATION
• It is due to advancement in technology.
• New invented resources for a function can make the already working
resource uneconomical and outdated.
• E.g. stream engines lost their value upon invention of petrol/diesel
engines.

10. 4. DEPRECIATION DUE TO ACCIDENT
• Sometimes, asset loses its physical/technological characteristics due to
sudden failure or accident.

11. 5. DEPRECIATION DUE TO DEPLETION
• It is termed as “consumption of an exhaustible natural resource to produce a
product or service is called depletion”.
• Removal of natural resource decreases value of the site.
• Depletion cost per unit =
Total cost − Residual cost
Total estimated units available
• Total Depletion = cost per unit x no. of units extracted

12. 6. MONETARY DEPRECIATION
• A change in price level decreases the value of the asset.
• If the price of an asset increases, it makes replacement of that asset more expansive.

13. 7. DEPRECIATION DUE TO TIME FACTOR
• Some assets lose their value after a particular time period.
• E.g. copyrights and patent rights may loose their value upon expiry of
time limit.

14. 8. DEPRECIATION DUE TO DEFERRED
MAINTENANCE
• No proper maintenance of any asset can bring loss to its value.
• Depreciation of that asset quickens up due to deferred maintenance. Life of asset is
decreased.

15. PURPOSES OF DEPRECIATION
• To ascertain the true and fair profits
• To show the asset’s proper value
• To make arrangement of funds for replacement of fixed asset
• Ascertaining accurate cost of production
• To comply with legal provisions
• To avail tax benefits

16. DEPRECIABLE PROPERTY
• A property that can be amortized or depreciated. It can be tangible or intangible.
• Land is never depreciated.
• A property is depreciated in following cases
• Th property must be used in a business or to produce income
• It must be something that looses its value. It should wear out, decay,
deteriorate or show depletion.
• Property must have specific life and that life must be more than one year.

17. VALUE
• Depreciation is defined as decrease in value. So, understanding value if also very
important.
• It is defined as “Present Worth Of All The Future Profits That Are To Be Received
Through Ownership Of A Particular Property.”
• Different types of values are used in field. Some of them that will be helpful during
depreciation calculations are being discussed here.

18. It is the estimated worth of an asset, based on how much a
buyer would be willing to pay the seller.Market Value
This is what the property is worth to the owner as an
operating unit.Use Value
It is the current value of the asset with respect to the asset's
useful life.Book Value
It is the estimated resale value of an asset at the end of its
useful life.Salvage Value
Value of asset if it is sold for junk.When the asset remains
of no use. Sometimes it is as same as salvage valueScrap Value
Value set by a third party to make it fair for both the seller
and the buyer.Fair Value

19. NEXT LECTURE
• Method of Depreciation
• Straight Line Method
• Declining balance method
• Double declining balance method
• Sum of the years method
• Straight line to declining balance method

20. THANKS…
Any Questions???
Comment below or
You can find me at shabbar.199@gmail.com
For verbal elaboration of the topic with examples, you can visit myYouTube channel
https://www.youtube.com/channel/UCXC8T28HR22U5xK3pMjNOUQ