This document discusses various methods of depreciation for fixed assets. It defines depreciation as the allocation of the cost of a fixed asset over its useful life. Common causes of depreciation include physical deterioration, obsolescence, depletion, and passage of time. Popular depreciation methods include straight-line, reducing balance, revaluation, units-of-output, double-declining balance, and sum-of-the-years'-digits. Each method calculates depreciation expense differently, with advantages and disadvantages to consider.

1. DEPRECIATION
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2. FIXED ASSETS
• Assets acquired not for resale.
• Help to earn revenue for more than 1 financial year.
Examples :
- A printing machine in a printing company.
- A van in a courier service company.
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3. DEFINITION OF DEPRECIATION
• Applies only to fixed assets.
• The whole cost of the fixed assets must be spread over
its useful life.
• The portion of the cost allocated to a particular accounting
period is charged as an expense against revenue
(Matching principle).
• This portion of the cost is called Depreciation.
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4. CAUSES OF DEPRECIATION
 Physical Deterioration
 Obsolescence
 Depletion of an asset
 Passage of Time
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5. PHYSICAL DETERIORATION
• Caused by physical wear and tear
- rust, erosion, rot and decay
Examples - office furniture
- printing machines
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6. OBSOLESCENCE
• Fixed assets become out-of-date
- when new model or more efficient tool come into existence.
Pentium I
Examples - cars
- computers
Pentium IV
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7. DEPLETION OF FIXED ASSETS
• An asset that depletes over time as resources
are extracted from it. Little Guilin
Examples - Gold mines
- Quarries
- Little Guilin is a depleted granite quarry now
turned into a beautiful lake.
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8. PASSAGE OF TIME
• Some assets confer upon their holders the
exclusive rights to enjoy certain privileges
for a fixed period of time.
Examples - copyrights
- patent rights
- leases on land
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9. METHODS OF DEPRECIATION
• Straight-Line
Units-of-output
• Reducing Balance
Double-declining-balance
• Revaluation
Sum-of-the-years'-digits

10. STRAIGHT LINE METHOD
• A fixed asset is depreciated by an equal amount per year.
Example:
If an asset is depreciated by $1,000 in the first full year of
usage, it will also be depreciated by $1,000 in the second
year; $1,000 in the third year and this continues annually
until it is fully depreciated.
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11. STRAIGHT LINE METHOD
• Advantages
- Easy to calculate.
- Easy to understand.
•Disadvantage
- Assumes fixed asset gives same amount of service annually
throughout its useful life.
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12. STRAIGHT LINE METHOD (I)
A machine X costs $20,000 is expected to last 4 years.
At the end of the 4th year, it can be sold for $2,000 as scrap.
( Scrap value is the same as residual value.)
Depreciation per year = Original cost - Residual value
Expected useful life
20,000 - 2000
=
4
= $4,500
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13. Balance Sheet as at 31 Dec 1999
Fixed asset
Office equipment $16,000
Less Prov. for dep. 2,000 $14,000
Balance Sheet as at 31 Dec 2000
Fixed asset
Office equipment $16,000
Less Prov. For dep. 4,000 $12,000
Dep
O/E
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14. IMPORTANT FEATURES:
• Fixed asset account shows original cost of asset.
• Provision for Depreciation account shows
accumulated depreciation of fixed asset.
• Net book value of fixed asset (in Balance Sheet)
is original cost less Provision for Depreciation.
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15. REDUCING
BALANCE METHOD OF
DEPRECIATION
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16. REDUCING BALANCE METHOD
• The amount of depreciation per year diminishes with
every successive year.
Example:
- If an asset is depreciated by $2,000 in the first full year
of usage, it will be depreciated by less than $2,000
(eg $1,600) in the second year; and even less (eg $1,300)
in the third year. This continues until it is fully depreciated.
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17. REDUCING BALANCE METHOD
•Advantage
- Overall expenses ( including repairs and maintenance)
charged for the use of a fixed asset would be fairly
constant.
•Disadvantages
- Difficult to calculate.
- Assets are always left with a small value at the end of
useful life.
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18. REDUCING BALANCE METHOD
Depreciation per year
= Rate of depreciation X Net book value at beginning of
accounting period
Net book value = Original cost - Accumulated depreciation
Accumulated depreciation is the sum of the yearly depreciation.
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19. REDUCING BALANCE METHOD
A machine Y costs $10,000 is depreciated at 20% per annum
on the reducing balance method. Show depreciation for the
first 3 years.
Net Book
Depreciation Value
Year 1 20 X 10,000 = $2,000 $10,000-2,000=$8,000
100
Year 2 20 X 8,000 = $1,600 $10,000-3,600= $6,400
100
Year 3 20 X 6,400 = $1,280 $10,000-4,880=$5,120
100
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20. REVALUATION
METHOD OF
DEPRECIATION
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21. REVALUATION METHOD
• The fixed asset is revalued at the end of every accounting
period.
• Depreciation is the difference between the value of the fixed
asset at the beginning and end of the accounting period.
• The amount of depreciation varies every year.
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22. REVALUATION METHOD
Example:
- An asset can be depreciated by $1,000 in the first full year
of usage, it can be depreciated by a different amount in the
second year (eg $500 ); and a different amount in the third
year (eg $1,200 ) depending on the valuation at the end of
the accounting period and the cost or valuation at the
beginning of the accounting period.
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23. REVALUATION METHOD
•Advantage
- Fixed asset is shown at current or realisable value.
•Disadvantage
- Time consuming and costly to value the fixed asset.
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24. REVALUATION METHOD (I)
Cost of printing machine on 1 Jan 2000 = $15,000.
Market value on 31 Dec 2000 = $13,000.
Depreciation of printing machine for FY2000
= cost on 1 Jan 2000 – market value on 31 Dec 2000
= 15,000 – 13,000
= $2,000
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25. REVALUATION METHOD (II)
This method is normally used for loose tools where it is
difficult to estimate the rate of depreciation.
The value of the asset may be inflated by new purchases
and this has to be taken into account when calculating
depreciation.
Depreciation expense
= Value of asset - Value of asset + Any new
at the beginning at the end purchases
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26. REVALUATION METHOD (II)
On 1 Jan 2000 loose tools in the workshop were valued at
$2,000. During the year, tools worth $1,000 were bought.
On 31 Dec 2000, the estimated market value of the tools was
$2,600.
Depreciation expense
= Value of tools - Value of tools + New purchases
on 1 Jan 2000 on 31 Dec 2000
= 2,000 - 2,600 + 1,000
= $400
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27. THE UNITS-OF-OUTPUT METHOD
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28. THE DOUBLE-DECLINING BALANCE METHOD
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29. THE SUM-OF-THE-YEARS'-DIGITS METHOD
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