Prepared By: Muhammad Awais

Sarmad Ali
Kamran Zaheer
 Depreciation
Gradually decrease in the value of assets is Known as Depeciation.

It is a process of allocating Costs

Cost to be allocated = Acquisition Cost (Purchase Price) – Scrap Value

Depreciation Methods
1. Straight Line / 2. Declining Balance / 3. Sum-of-the-year’s-digits / 4. Unit of Production
• To calculate proper profits.
• To show the asset at its reasonable value.
• To provide of replacement of an asset.
• Depreciation is permitted to be deducted
from profits for tax purposes.
• Wear and Tear
• Disuse
• Maintenance
• Change in production
• Restriction of production
• Reduced demand
 1. Straight Line Depreciation Method
Depreciation = (Cost – Residual/Scrap Value)
Useful Life
Depreciate at equal rate throughout the life

Illustration Question:
On Jan, 2011, a Company purchased an equipment at a cost of Rs 140,000,
having a life span of 5 years. At the end of the 5th year the scrap value will be
Rs 20,000. Calculate the depreciation for 2011 & 2012 using straight line
depreciation method.
 Answer
Cost = 140,000
Salvage Value = 20,000
Life = 5
Depreciation = (Cost – Residual/ Scrap Value)
Useful Life
Depreciation for 2011 = (140,000 – 20,000)
5
= 12,0000 = Rs 24,000
5

Depreciation for 2012 = (140,000 – 20,000)

5
= 120,000 = SR 24,000
5
 2. Reducing Balance Method

Depreciation = Book Value x Depreciation Rate

Book Value = Cost – Accumulated

Depreciation
 Illustration Question:

On January, 2011, a Company purchased an equipment at a cost of Rs

140,000, having a useful life of 5 years. The depreciation rate is 20%.

a) Calculate the depreciation from 2011 to 2015 using Reducing Balance

Depreciation method. Also calculate the scrap value of the equipment at the
end of the year 2015.
 Answer
Depreciation = Book Value x Depreciation Rate

Book Value = Cost – Accumulated Depreciation

Year Book Value (SAR) in the Depreciation

beginning
2011 140,000 (140,000) (20/100) = 28,000
2012 140,000 – 28,000 = 112,000 (112,000) (20/100) = 22,400
2013 112,000 – 22,400 = 89,600 (89,600) (20/100) = 17,920
2014 89,600 – 17,920 = 71,680 (71680) (20/100) = 14,336
2015 71,680 – 14,336 = 57,344 (57,344) (20/100) = 11,469
At the end of the year 2015, the Scrap Value = 57,344 – 11,469 = Rs 45,875
3. Sum-of-the-year’s-digits method
This method is popular in the USA but not common in the UK. It provides for
higher depreciation to be charged early in the life of an asset with lower
depreciation in the last year.

Illustration Question:

Given an asset costing Rs 3000 which will be in use for 5 years, the calculations will
be:
From purchase the asset will last for 5 years
From the second year the asset will last for 4 years
From the Third year the asset will last for 3 years
From the fourth year the asset will last for 2 years
From the fifth year the asset will last for 1 years

Sum of these digits 15

 Answer
Rs
1st year 5/15 of Rs 3000 is charged= 1000
2nd year 4/15 of Rs 3000 is charged= 800
3rd year 3/15 of Rs 3000 is charged= 600
4th year 2/15 of Rs 3000 is charged= 400
5th year 1/15 of Rs 3000 is charged= 200
3,000
 4.Depletion Unit Method
All natural resources like mines, fuel oil, gas and woods are ending by using them. We
calculate the depreciation with depletion method for such perishing assets. Under
this method, first, we estimate the total value of assets. After this, we calculate the rate
of depreciation per unit by dividing the estimated life in the term of production of
units.

Formula

Depreciation Rate under Depletion Method

= Original Cost - Scrap Value / Estimated life in terms of production units

 5.Units of Output Method

' A depreciation procedure used for property that is not

in continuous use. The unit of production method is
useful when the property's value is more closely related
to the number of units it produces than the number of
years it is in use.

Formula:

Depreciation = Number of units produced × ( Cost – Scrap Value)

Life in Number of Units
 6.Machine hour Method
As per machine hour rate method of depreciation, we calculate the total life of any
fixed asset on the basis of its working hours life. After this, we divide actual cost of
fixed assets with life of fixed assets in hours. After dividing, we will obtain the
depreciation rate per hour. This method will apply mostly on the machines. So, in
following formula, we have used the word machine instead of fixed asset.

Hourly depreciation Rate= Original Cost of Machine – scrap Value

Estimated Life of Machine in Hours