DEPRECIATION AND DEPLETION

Prepared by:
Rey Bagro
DEPRECIATION
Defined as the decrease in worth of a property due to
passage of time.
TWO TYPES OF DEPRECIATION
1. Physical Depreciation
It is due to the deterioration caused by various chemical and
mechanical factors on the materials composing the property.

2. Functional Depreciation
It is due to the decrease in the demand of the equipment of which it
was designed such as obsolescence and changes in methods of
production.
METHODS OF EVALUATION
1. Straight Line Method (SLM)
2. Sinking Fund Method (SFM)
3. Sum of the Years Digit Method (SYDM)
4. Declining Balance Method (DBM) or Methesons Formula
5. Double Declining Balance Method (DDBM)
6. Service-Output Method (SOM)
1. STRAIGHT LINE METHOD (SLM)
It
is the simplest method in evaluating depreciation. The
depreciation charge is kept constant every year.

Formula: Where:
( ) d = constant depreciation charge per year
1. d = = Total Depreciation after n years

= Book Value after n years
2. = nd = ( ) = Original Cost
= Salvage Value
3. = - L = Useful Life
 2. SINKING FUND METHOD (SFM)
It
is the method of evaluating the depreciation where interest is
included and still the depreciation charge is constant every year.
Formula:

1. d = Where:
(1+) 1
d = constant depreciation charge per
(1+) 1 1+ 1 year
2. Dn = d = ( )
1+ 1 = Total Depreciation after n
years
3. Cn = - = Book Value after n years
= Original Cost
= Salvage Value
L = Useful Life
3. SUM OF THE YEARS DIGIT METHOD (SYDM)
It
is the method of evaluating the depreciation where the
depreciation charge varies from year to year.

Ocampos Formula: Where:

2 +1
= Total Depreciation after n years
1. = +1
( ) = Book Value after n years
= Original Cost
2+1
2. = ( ) = Salvage Value
+1 L = Useful Life
3. = - = depreciation charge at the nth year,
other nomenclature remains the same.
4. DECLINING BALANCE METHOD (DBM) OR
MATHESONS FORMULA
It
is the method of evaluating the depreciation where the
depreciation charge is constant percentage of a book value at the
beginning of the year. It can be noted that the depreciation charge
varies from year to year. Where:
= Total Depreciation after n years
= Book Value after n years
1. = (1 )(1) = Original Cost
2. = (1 ) = Salvage Value
L = Useful Life
3. = (1 ) = depreciation charge at the nth year,
4. = 1(1 ) other nomenclature remains the same.
k = constant percentage in the declining

k = 1- book value
Note: DBM is not applicable if = 0
5. DOUBLE DECLINING BALANCE METHOD (DDBM)
It
is the method of evaluating depreciation which is very similar to
2
DBM. This time the term k is simply replaced by

Where:
= Book Value after n years
2 2 (1) = Original Cost
1. = (1 ) = Salvage Value

2 L = Useful Life
2. = (1 )
= depreciation charge at the nth year,
2 other nomenclature remains the same.
3. = (1 )

6. SERVICE-OUTPUT METHOD (SOM)
This
is a method of evaluating depreciation based on the actual
number of hours used or number of units produced.
A. Service (Number of Hour Used)
Where:
d = constant depreciation charge per year
= Original Cost
1. = = Salvage Value

= depreciation charge at the nth year,
2. = other nomenclature remains the same.

H = total number of hours used within the
useful life
Hn = number of hours used at the
6. SERVICE-OUTPUT METHOD (SOM), CONT

B. Output (Number of Units Produced)

Where:
d = constant depreciation charge per year
= Original Cost
1. = = Salvage Value

= depreciation charge at the nth year,
2. = other nomenclature remains the same.

T = total number of units produced within
the useful life
= number of units produced at the
year
B. SUNK COST (SC)
It is defined as the cost which cannot be recovered due to certain
reasons. This cost is the result when trading in an equipment without
knowing the current book value. Furthermore, it is one among the
costs where depreciation is applied.

1. SC = - Trade In Value

Note: Trade In Value is also called re-sale value.

= Book Value after n years