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Depreciation & Amortisation
This document defines and explains various accounting concepts related to asset valuation over time. It defines depreciation as a non-cash expense that reduces the value of an asset over its useful life. It then describes different depreciation calculation methods like straight-line, sum-of-years digits, and declining balance. The document also discusses amortization, write-offs, and sinking funds which are methods used to allocate capital costs over a period of time. Examples are provided to illustrate how to calculate depreciation and amortization using different formulas and rates.
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Depreciation & Amortisation
- 1. By, Saran raj SL Chenthylathiban S K Jeeviga J Preethy S Manisha Susan
- 2. DEFINITION Depreciation is anon – cash expense that reduces the value of an asset over a period of time Reason for asset depreciation ◦ Wear and tear of machinery ◦ Obsolescence – value gets depreciated due to replacement of newer models Methods for calculating depreciation ◦ Straight line method ◦ Sum of years depreciation ◦ Declining balance calculation
- 3. Straight line method Straightline method depreciates cost evenly through out the useful life of the fixed asset. Formula Depreciation per annum = (Cost – Salvage value) Useful life Salvage value – The estimated value that an asset will realize upon its sale at the end of its useful life. Company
- 4. Example Cost of theasset 10500 Less: salvage value 500 Depreciable cost 10000 Years of estimated useful time (in yrs) 5 Depreciation = 10500 – 500 5 = Rs. 2000
- 5. Sum of year’smethod ◦ Accelerated depreciation technique ◦ based on the assumption that assets are more productive when they are new and productivity decreases with time Formula Depreciation = depreciation base * remaining useful life sum of year’s digits Example Cost of the asset – Rs. 45000 Salvage value – Rs. 5000 Useful life – 4 years
- 6. Calculation Year Depreciation base (Rs) DepreciationDepreciation factor expense Accumulated depreciation 1 40000 4/10 16000 16000 2 40000 3/10 12000 28000 3 40000 2/10 8000 36000 4 40000 1/10 4000 40000 Depreciation factor = n(n+1) 2 = 4*5 2 = 10
- 7. Reducing balance method ◦Reducing Balance Method charges depreciation at a higher rate in the earlier years of an asset. ◦ The amount of depreciation reduces as the life of the asset progresses. ◦ Depreciation under reducing balance method may be calculated as follows: ◦ Depreciation per annum = (Net Book Value - Residual Value) x Rate%
- 8. Example o o o o o An asset hasa useful life of 3 years. Cost of the asset is $2,000. Residual Value is $500. Rate of depreciation is 50%. Depreciation expense for the three years will be as follows:
- 9. Definition Amortization is knownas the paying off of debt in regular instalments over a period of time. Amortization is also known as the deduction of capital expenses over a specific period of time (usually over the asset's life). Measures the consumption of the value of intangible assets, such as a patent or a copyright. Example borrowing amount – Rs. 100000 payment – monthly payment for 30 years
- 10. Write off isa reduction in the value of an asset or earnings by the amount of an expense or loss. For example: - when an account receivable cannot be collected, - or when inventory is obsolete, - when there is no longer any use for a fixed asset, - or when an employee leaves the company and is not willing to pay the company back for a pay advance. The general concept is to credit the asset account and debit an expense account.
- 11. Also called assinking fund or amortization fund Definition ◦ A fund set up by a company to provide money to buy new fixed assets. ◦ Every year the company invest certain amount that is equal to existing asset’s depreciation value ◦ This facilitates the company to use the money to buy new assets Formula Annual depreciation charges = ((C-R)/((1+i)n-1)/i) C – cost of asset R – residual value i – interest rate n – no of years
- 12. Example An asset hasRs.21,000 of original cost, Rs.1,000 of residual value, and 5 year of useful life. The annual interest for money earned is 5%. Depreciation charge = ( 21,000 - 1,000)/((1+5%)5 - 1)/5%) = 20,000/5,52563 = Rs. 3,619.50 Depreciation schedule
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