This document discusses various depreciation methods including straight line, declining balance, sum-of-the-years digits, unit of production, depletion, and machine hour methods. Depreciation is the process of allocating the cost of an asset over its useful life. It is calculated by taking the original cost minus the scrap value and dividing by the number of years or other relevant unit of the asset's life. Examples are provided for calculating depreciation under different methods.

1. Prepared By: Muhammad Awais
Sarmad Ali
Kamran Zaheer

2. Depreciation
Depreciation Methods
1. Straight Line / 2. Declining Balance / 3. Sum-of-the-year’s-digits / 4. Unit of Production
It is a process of allocating Costs
Cost to be allocated = Acquisition Cost (Purchase Price) – Scrap Value
Gradually decrease in the value of assets is Known as Depeciation.

3. • To calculate proper profits.
• To show the asset at its reasonable value.
• To provide of replacement of an asset.
• Depreciation is permitted to be deducted
from profits for tax purposes.

4. • Wear and Tear
• Disuse
• Maintenance
• Change in production
• Restriction of production
• Reduced demand

5. 1. Straight Line Depreciation Method
Illustration Question:
On Jan, 2011, a Company purchased an equipment at a cost of Rs 140,000,
having a life span of 5 years. At the end of the 5th year the scrap value will be
Rs 20,000. Calculate the depreciation for 2011 & 2012 using straight line
depreciation method.
Depreciation = (Cost – Residual/Scrap Value)
Useful Life
Depreciate at equal rate throughout the life

6. Answer
Cost = 140,000
Salvage Value = 20,000
Life = 5
Depreciation = (Cost – Residual/ Scrap Value)
Useful Life
Depreciation for 2011 = (140,000 – 20,000)
5
= 12,0000 = Rs 24,000
5
Depreciation for 2012 = (140,000 – 20,000)
5
= 120,000 = SR 24,000
5

7. 2. Reducing Balance Method
Depreciation = Book Value x Depreciation Rate
Book Value = Cost – Accumulated
Depreciation

8. Illustration Question:
On January, 2011, a Company purchased an equipment at a cost of Rs
140,000, having a useful life of 5 years. The depreciation rate is 20%.
a) Calculate the depreciation from 2011 to 2015 using Reducing Balance
Depreciation method. Also calculate the scrap value of the equipment at the
end of the year 2015.

9. Answer
Year Book Value (SAR) in the
beginning
Depreciation
2011 140,000 (140,000) (20/100) = 28,000
2012 140,000 – 28,000 = 112,000 (112,000) (20/100) = 22,400
2013 112,000 – 22,400 = 89,600 (89,600) (20/100) = 17,920
2014 89,600 – 17,920 = 71,680 (71680) (20/100) = 14,336
2015 71,680 – 14,336 = 57,344 (57,344) (20/100) = 11,469
At the end of the year 2015, the Scrap Value = 57,344 – 11,469 = Rs 45,875
Depreciation = Book Value x Depreciation Rate
Book Value = Cost – Accumulated Depreciation

10. 3. Sum-of-the-year’s-digits method
This method is popular in the USA but not common in the UK. It provides for
higher depreciation to be charged early in the life of an asset with lower
depreciation in the last year.
Illustration Question:
Given an asset costing Rs 3000 which will be in use for 5 years, the calculations will
be:
From purchase the asset will last for 5 years
From the second year the asset will last for 4 years
From the Third year the asset will last for 3 years
From the fourth year the asset will last for 2 years
From the fifth year the asset will last for 1 years
Sum of these digits 15

11. Answer
Rs
1st year 5/15 of Rs 3000 is charged= 1000
2nd year 4/15 of Rs 3000 is charged= 800
3rd year 3/15 of Rs 3000 is charged= 600
4th year 2/15 of Rs 3000 is charged= 400
5th year 1/15 of Rs 3000 is charged= 200
3,000

12. All natural resources like mines, fuel oil, gas and woods are ending by using them. We
calculate the depreciation with depletion method for such perishing assets. Under
this method, first, we estimate the total value of assets. After this, we calculate the rate
of depreciation per unit by dividing the estimated life in the term of production of
units.
4.Depletion Unit Method
Formula
Depreciation Rate under Depletion Method
= Original Cost - Scrap Value / Estimated life in terms of production units

13. 5.Units of Output Method
' A depreciation procedure used for property that is not
in continuous use. The unit of production method is
useful when the property's value is more closely related
to the number of units it produces than the number of
years it is in use.
Formula:
Depreciation = Number of units produced × ( Cost – Scrap Value)
Life in Number of Units

14. 6.Machine hour Method
As per machine hour rate method of depreciation, we calculate the total life of any
fixed asset on the basis of its working hours life. After this, we divide actual cost of
fixed assets with life of fixed assets in hours. After dividing, we will obtain the
depreciation rate per hour. This method will apply mostly on the machines. So, in
following formula, we have used the word machine instead of fixed asset.
Hourly depreciation Rate= Original Cost of Machine – scrap Value
Estimated Life of Machine in Hours