depreciation Analysis

1. SCHOOL OF MECHANICAL AND
INDUSTRIAL ENGINEERING
Depreciation
Year:2024
by :Ephrem T

2. Introduction
1
Methods of Depreciation
2
Straight Line Method of Depreciation
3 CH-5
Content
Sum-of-Years'-Digits Depreciation
4
Declining Balance Depreciation
5
Unit production method of depreciation
6

3. A d d y o u r t i t l e
01
ntroduction
I
Introduction

4. cont'd
 Any equipment which is purchased today will not work for ever. This may
be due to wear and tear of the equipment or obsolescence of technology.
 The replacement of the equipment at the end of its life involves money.
 This must be internally generated from the earnings of the equipment.
 The recovery of money from the earnings of an equipment for its
replacement purpose is called depreciation fund since we make an
assumption that the value of the equipment decreases with the passage of
time.
 Book value = Asset cost - Depreciation charges made to date
Introduction

5. cont'd
There are several methods of accounting depreciation fund. These are as
follows:
1. Straight line method of depreciation
2. Declining balance method of depreciation
3. Sum of the years—digits method of depreciation
4.Unit production method of depreciation
Methods of Depreciation

6. cont'd
 a fixed sum is charged as the depreciation amount throughout the lifetime.
accumulated sum of depreciation= purchase value
Here, we make an important assumption that inflation is absent.
To calculate the constant annual depreciation charge, the total’ amount to be
depreciated, B - S, is divided by the depreciable life, in years, N
Annual depreciation charge
Straight Line Method of Depreciation

7. cont'd

8. cont'd

9. cont'd
 Sum-of-years'-digits (SOYD) depreciation. This method results in larger-
than straight-line depreciation charges during an asset's early years and
smaller charges as the asset nears the end of its depreciable life.
 Each year the depreciation charge equals fraction of the total amount to be
depreciated(B - S). The denominator of the fraction is the sum of the years'
digits
 For example if the depreciable life is 5 years, 1+ 2 + 3 + 4 + 5 = 15=
SOYD. Then 5/15,4/15,3/15,2/15, and 1/15 are the fractions from Year 1 to
Year5. Each year the depreciation charge shrinks by 1/15 of (B – S)
Sum-of-Years'-Digits Depreciation

10. cont'd

11. cont'd

12. cont'd

13. cont'd
 Declining balance depreciation applies constant depreciation rate to the
property's declining book value
Double Declining Balance Depreciation

14. cont'd


15. cont'd

16. cont'd
 The units of production depreciation method asset based on the total number
hours used or total number of units to be produced.
Unit production method of depreciation

17. cont'd
 The units of production depreciation method asset based on the total number
hours used or total number of units to be produced.
 Depreciation =( cost-salvage value) /life in number of units(number of unit
produced)
 Consider a machine costs 25000 with estimated total unit of production
of 100 million and salvage value is 0. during the first year of activity the
machine produced 4 million unite.
 D1 = (25000-0)/100million) (4million)=1000
 D2= (25000-0) /100million)(7million)=1750
 D3= (25000-0 )/100million)(4million)=1000
 D4= (25000-0 ) /100million)(23million)=5750
Unit production method of depreciation

18. cont'd
years 1 2 3 4 5 6 7 8
Production
unit in million
4 7 4 23 32 12 6 12
Opening book 25000 2400
0
22250 2125
0
15500 7500 4500 3000
Depreciation 1000 1750 1000 5750 8000 3000 1500 3000
Ending book
value
250
00
24000 2225
0
21250 1550
0
7500 4500 3000 -
Depreciation
rate
0.0
002
5

19. Question
Introduction
Methods of Depreciation
Straight Line Method of Depreciation
Sum-of-Years'-Digits Depreciation
Declining Balance Depreciation
Unit production method of depreciation