Prestation Title
Depreciation

Agenda
Introduction
Internal
External
Method I
Method II
Applications

Introduction
Defination:
•Reduction
•Wear and Tear
Causes:
Two types....
Internal:
°Wear and Tear
°Depletion
External:
°Obsolescence
°Efflux of Time
°Accident

Internal
Inherent Normal Causes
Wear and Tear:
°Account of Continued use
e.g.
•Building
•Plant
Depletion:
°Proportionate to the Quantum of
Production
e.g.
•Mine
•Quarry

External
External Reasons
Obsolescence:
°Proper working
°Become Obsolete
e.g.
•Old Machines
Efflux of Time:
°Account of sheer passage of Time
e.g.
•Leasehold House
Accident:
°Destroyed by Abnormal
Reasons
e.g.
•Fire

Method I
• Straight Line Method
• Equal Each Year
• Formula
(Cost – Scrap Value) /
Estimated Value

Method I
Example:
Cost of an
Asset=2500
Scrap
Value=500
Life=5
Years
Appling
formula...
(2500-
500)/5=400

Method I
Depreciation for 3
years:
•1st Year = 2500 – 400 =
2100
•2nd Year = 2100 – 400 =
1700
•3rd year = 1700 – 400 =
1300

Method II
• Diminishing Balance Method
• Fixed Percentage
• Formula
Depreciation = (Cost –
Scrap Value) * Depreciation Rate

Method II
Example:
Cost of an
Asset=$5000
Scrap Value=$1000
Rate=40%
Appling formula...
((5000-
1000)*40)/100=1600

Method II
Depreciation for 3 years:
1st year = ((5000-1000)*40)/100
= 1600
2nd year = ((4000 –
1600)*40)/100 = 960
3rd year = ((2400 – 960)*40)/100
= 576

Applications
Matching
Expense
Asset
Valuation
Cost
Recovery
Tax
Deduction