Professional Documents
Culture Documents
C K Biswas
Dept of ME
Learning objectives
1. Definition of depreciation
2. To calculate the depreciation of assets
3. Types of depreciation methods and their
application
i. Straight line method
ii. Reducing balance method
iii. Sum of the years digit method
iv. Sinking fund method
v. Machine hour method
vi. Production unit method
vii. Annuity charging method
viii.Depletion method
Definition
It is the allocation of the
depreciable amount/ mon
ey of an asset over its esti
mated life.
Depreciation Methods
Types of depreciation methods and their applicatio
n
A.
B.
C.
D.
E.
Example
Cost of assets
Residual value
Useful life
Rs10,000
Rs256
4 years
Annual depreciation
= 10000-256
4
=Rs2,436
S= scrap value
C=initial cost
n= useful life
Example
Cost of assets
Residual value
Useful life
60%
Rs10,000
Rs256
4 years
Annual Depreciation
Annual Depreciation
Year 1
10,000 x 60%
= Rs6,000
Year 2
= Rs2,400
Year 3
= Rs 960
Year 4
=Rs 384
Salvage value
=Rs 256
Initial cost
=Rs10,000
Example
Cost of assets
Rs10,000
Residual value
Rs256
Annual interest rate
10%
Useful life
4 years
per year
Depreciation in Year 1 =
Depreciation in Year 2 =
Depreciation in Year 3 =
Depreciation in Year n =
With
diminishing
years of life
to run
Example
Cost of assets
Residual value
Useful life
Rs10,000
Rs256
4 years
Sum of digits =
Depreciation in Year 1 =
Depreciation in Year 2 =
Depreciation in Year 3 =
Depreciation in Year 4 =
Depreciation
fund= Cost-Scrap
Life of machine= Annual usage x Useful life
Depreciation charge = per hr
Example
Cost of machine
Rs10,000
Scrap value
Rs256
Annual usage of m/c 2000 hrs
Useful life
4 years
Depreciation
fund= Cost-Scrap = 10000-256
Life of machine= Annual usage x Useful life = 2000
x 4 hr
Depreciation charge = per hr
= = Rs 1.218 per hr
= 1.218 x 2000 hrs
=Rs 2,436 per year
Comparison
Redu Sink Sum
year St line bal
Fund Digit
0
Mc hr
6103
7564
3180
5128
2692
640 3701
1232
2692
256
256 1602
258
256