Depreciation Calculation Methods...

1. DEPRECIATION - ANALYSIS
Lecture No. 2
Presented by:-
Syed Shabbar Abbas Naqvi
Lecturer
Govt. College Of Technology
Jhang, Punjab, Pakistan

2. DIFFERENT METHODS OF DEPRECIATION
Declining
Balance To
Straight Line
Method
Sum Of The
Years Digits
Method
Double
Declining
Balance
Method
Straight Line
Method
Declining
Balance
Method
Modified
Accelerated
Cost
Recovery
System
(MACRS)

3. 1. STRAIGHT LINE METHOD
• This method assumes a directly proportional relation
between life of the asset and loss in the value.
• That is why this method is called straight line
method.
• In other words, value of the asset decreases at a
constant rate.
• Annual depreciation =
Original cost − salvage value (optional)
useful life of asset

4. 1. STRAIGHT LINE METHOD
End Of The
Year
Depreciable
Value
Annual Depreciation
Value
Book Value At The End Of
The Year
1 Original Value
Original Cost − Salvage Value
Useful Life Of Asset
Original Cost – Annual Depreciation
2
Book value at the
end of year 1
Original Cost − Salvage Value
Useful Life Of Asset
Original Cost – 2 (Annual Depreciation)
3
Book value at the
end of year 2
Original Cost − Salvage Value
Useful Life Of Asset
Original Cost – 3 (Annual Depreciation)
N
Book value at the
end of year 3
Original Cost − Salvage Value
Useful Life Of Asset
Original Cost – N (Annual Depreciation)

5. 1. STRAIGHT LINE METHOD
EXAMPLE
• Cost of an asset = $ 900
• Salvage Value = $ 70
• Depreciable Life = 5 years
Solution:-
Depreciation =
900 −70
5
= 166
Salvage Value

6. 2. DECLINING BALANCE METHOD
• It is also called “Fixed Percentage Method” or “Matheson Formula”.
• It is assumed that asset depreciates with a fixed percentage of the salvage value at
the beginning of the year.
• Depreciation remains constant till whole life span of asset.
• The book value of asset may not be exactly equal to salvage value of asset.

7. 2. DECLINING BALANCE METHOD
• This formula assumes that asset depreciates faster initially lather than the later
portion of the service life.

8. 2. DECLINING BALANCE METHOD
End Of The
Year
Depreciable
Value
Annual Depreciation
Value
Book Value
1 Original Value *Rate x Depreciable Value Original Value – Annual Depreciation
2
Book Value At The
End Of Year 1
*Rate x Depreciable Value Original Value – Annual Depreciation
3
Book Value At The
End Of Year 2
*Rate x Depreciable Value Original Value – Annual Depreciation
4
Book Value At The
End Of Year 3
*Rate x Depreciable Value Original Value – Annual Depreciation
N
Book Value At The
End Of Year 4
*Rate x Depreciable Value Original Value – Annual Depreciation
* There is a fixed percentage (Rate) of depreciation every year.

9. 2. DECLINING BALANCE METHOD
EXAMPLE
• Cost of an asset = $ 5000
• Salvage Value = $ 1000
• Depreciable Life = 5 years
• Depreciation Rate = 30%
Solution:-
Salvage
Vsalue

10. • If declining balance method is to be used for calculations, maximum rate of
depreciation should be used.
• To maximize the rate, experts use a rate double to that of straight line depreciation
rate.
• Such double rate (
2
𝑁
) depreciation method is called “Double Declining Depreciation
Method (DDB)”

11. 3. DOUBLE DECLINING BALANCE METHOD
• This is an accelerated form of depreciation as assets depreciate double the rate of
depreciation in straight line method.
• It is also known as the “reducing balance method”. It is most commonly used by
business men for depreciation calculations of a long-lived asset.
• As compared to the straight-line method, the depreciation expense will be faster in
the early years of the asset's life but slower in the later years.

12. 3. DOUBLE DECLINING BALANCE METHOD
* Rate = (2/N) while “N” is useful life of asset
Following is the difference between straight line(SL) and double declining balance
(DDB) methods…
• Rate is double in DDB as compared to SL
• Annual Depreciation value is not fixed as it is in SL Method.

13. 3. DOUBLE DECLINING BALANCE METHOD
EXAMPLE
• Cost of an asset = $ 900
• Salvage Value = $ 70
• Depreciable Life = 5 years
Solution:-
Depreciation rate =
2
5
𝑥 100
= 40%
End of theYear
Depreciable
Value
Annual
Depreciation
Book Value
1 900
40% x 900 =
360
900 – 360 = 540
2 540 216 324
3 324 129.6 194.4
4 194.4 77.76 116.64
5 116.64 46.656 70
Salvage
Value

14. NEXT LECTURE
• Depreciation methods
• Sum of years digit method
• Declining balance switching to straight line depreciation method
• Modified Accelerated Cost Recovery System (MACRS)

15. 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