Presentation

Financial Accounting

Group Members:
1

Muhammad Afzal

11-Arid-830

M.Tufail Madni

11-Arid-842

Ishfaq Ahmad

11-Arid-820

Fixed Assets and Depreciation

Objectives: 1. Definition 2. Causes 3. Factors

4. Methods

Defination of Depreciation
Depreciation is defined as the expensing of the cost of an asset involved in producing revenues throughout its useful life. Assets depreciate for two reasons:
Wear and Tear Obsolescence

Depreciation
Depreciation is calculated as follows: The original cost of the asset, including costs of acquiring the asset, transporting it, and setting it up Less the salvage value Divided over the years of useful life of the asset.

Depreciation
1. Depreciable Assets

2. Non-Depreciable Assets
Feehold Land Leasehold Land Investment Property

What can be depreciated?

You can depreciate property only if it meets the following requirements:
It is used in business or held for the production of income. It must be expected to last for more than one year. In other words, it must have a useful life that extends substantially beyond the year it was placed in service. It is property that wears out, decays, gets used up, becomes obsolete, or looses value from natural causes.

Depreciable property can be either tangible or intangible.

Tangible Depreciable Property

Purchased property you can see or touch
Livestock (purchased) Machinery Buildings and improvements, fences Dams, ponds, or terraces Irrigation systems and water wells Partial business use You can claim depreciation on the part of a vehicle used in the business.

When depreciation begins & ends?

Begins
When you place the property in service. When it is ready and available for a specific use in the business

Ends
When the cost of the item has been recovered or when it is retired from service, whichever happens first

Example

Example
When it was bought for the business

When it is sold or is not longer useable

Causes of depreciation

Custom or usage With some types of fixed assets for example cars and other vehicles ,there are customs which have been established,on the rate of wear and tear normally expected every year Abnormal occurences Accidents Defects in materials

Causes of depreciation

Excessive wear and tear Contingent occurences Technological developments New equipments superceding the existing ones eg:calculators replacing abacus Change in manufacturing methods Obsolecscence

Factors of Depreciation
1) Cost of asset (include expenses and capital expenditure incurred eg. The installation fees, the legal fees)

2) Estimated useful life of asset

This is the number of years that the asset is expected to be used)

3) Residual or scrap value of the asset This is the value of the asset at the end of its life. 4) Method of calculating depreciation

Methods

Straight Line Method

Declining Balance Method

Sum-of-years-digits Method Composite Depreciation Method

Methods of Depreciation
1- Straight-Line Depreciation Method
Straight-line depreciation is the simplest and most often used method. In this method, the company estimates the salvage value of the asset at the end of the period during which it will be used to generate revenues (useful life). Straight-line method of depreciation is based on the cost of an asset that is then depreciated, by the same amount, over the estimated useful life of the asset. Annual Depreciation Expense = Total Acquisition Cost Salvage Value / Useful Life

Methods of Depreciation
1- Straight-Line Depreciation Method
The depreciation expense can also be calculated by writing off a fixed percentage of cost of the asset. Straight-line depreciation produces a constant depreciation expense. At the end of the asset's useful life, the asset is accounted for in the balance sheet at its salvage value.

Methods of Depreciation
2- Declining Balance Method The double-declining balance method is a type of accelerated depreciation method that calculates a higher depreciation charge in the first year of an asset's life and gradually decreases depreciation expense in subsequent years.

Methods of Depreciation
3- Composite Depreciation Method
o The composite method is applied to a collection of assets that are not similar, and have different service lives. o For example, computers and printers are not similar, but both are part of the office equipment. o Depreciation on all assets is determined by using the straight-line-depreciation method.

Methods of Depreciation
3- Composite Depreciation Method
o Composite Life: equals the total depreciable cost divided by the total depreciation per year. o Composite Depreciation Rate: equals depreciation per year divided by total historical cost. o Depreciation expense equals the composite depreciation rate times the balance in the asset account. Debit depreciation expense and credit accumulated depreciation.

Methods of Depreciation
4. Sum-of-years-digits Method
Sum-of-years-digits is a depreciation method that results in a more accelerated write-off than the straight line method, and typically also more accelerated than the declining balance method. Under this method the annual depreciation is determined by multiplying the depreciable cost by a schedule of fractions. depreciable cost = original cost salvage value book value = original cost accumulated depreciation

Methods of Depreciation
4. Sum of Year Digits Method
It provides higher depreciation to be charged in the early years, and lower depreciation in the later periods.

Sum of digits = n(n+1) / 2

Where n = Useful economic life (number of years)

Methods of Depreciation
Depreciation should be charged as follows:
Year 1 (Cost Residual value) x n / Sum of digits Year 2 (Cost Residual value) x (n-1) / Sum of digits

Year 3 (Cost Residual value) x (n-2) / Sum of digits

Year 4 (Cost Residual value) x (n-3) / Sum of digits Year n (Cost Residual value) x 1 / Sum of digits

With diminishing years of life to run

Methods of Depreciation
Example
Cost of asset Estimated useful life No scrap value
Sum of digits = 5(5+1) / 2 = 15 $9,000

5 years
With diminishing years of life to run

Depreciation charge:
Year 1 $9,000 x 5/15 = $3,000 Year 3 $9,000 x 3/15 = $1,800 Year 5 $9,000 x 1/15 = $ 600 Year 2 $9,000 x 4/15 = $2,400 Year 4 $9,000 x 2/15 = $1,200

Thank You