1. The document discusses various methods of accounting for depreciation of fixed assets, including straight-line, units-of-production, and declining balance methods. 2. It explains that depreciation involves allocating the cost of tangible assets over the periods they are expected to provide benefits. 3. Key factors that determine depreciation expenses each year include initial asset cost, estimated residual value, useful life, and the depreciation method used.

1. Let’s look at… what we did in the last class…

2. We started with… ACCOUNTING FOR DEPRECIATION

5. We appreciated difference between Capital Expenditure vs Revenue Expenses

8. Where are they shown in the books of accounts?

9. Depreciation … Please note that all fixed assets are subject to Depreciation except freehold land .

13. Now, let’s move with Today’s Agenda…

16. Asset Depreciation Depreciation Economic Depreciation the gradual decrease in utility in an asset with use and time Accounting depreciation The systematic allocation of an asset’s value in portions over its depreciable life—often used in engineering economic analysis Physical Depreciation Functional Depreciation Book depreciation Tax Depreciation

17. Our next step is… How to determine the amount of depreciation each year so that it can be expensed to Profit and Loss Account?

18. What are the factors determining the depreciation expenses?

19. Depreciation Expense Factors Initial Cost Residual Value - Factor #1 Factor #2 F a c t o r #3 Factor#4: Method of determining the amount of Depreciation = Depreciable Cost Useful Life 1 Periodic Depreciation Expense 2 3 4 5

27. Straight-Line Method Cost – estimated residual value Estimated life = Annual depreciation

28. Example Original Cost.....………….. Rs.24,000 Estimated Life in years….. 5 years Estimated Residual Value... Rs.2,000

29. Straight-Line Method Rs. 24,000 – Rs. 2,000 5 years = Rs. 4,400 annual depreciation

30. Straight-Line Rate Rs.24,000 – Rs.2,000 5 years = Rs.4,400 Rs.4,400 Rs.24,000 = 18.3%

31. SLM – Depreciation Amount and Book Value

32. Straight-Line Method The straight-line method is widely used by firms because it is simple and it provides a reasonable transfer of cost to periodic expenses if the asset is used about the same from period to period.

33. Units-of-Production Method Cost – estimated residual value Estimated life in units, hours, etc. = Depreciation per unit, hour, etc.

34. Example Original Cost.....………….. Rs.24,000 Estimated Life in hours….. 10,000 Estimated Residual Value... Rs.2,000

35. Rs.24,000 – Rs.2,000 10,000 hours = Depreciation per unit, hour, etc. = Rs.2.20 per hour Units-of-Production Method

36. The units-of-production method is more appropriate than the straight-line method when the amount of use of a fixed asset varies from year to year. Units-of-Production Method

37. Declining-Balance Method Formula to calculate the Depreciation Rate

38. DBM – Depreciation Amount and Book Value