DEPRECIATION

Lecture No. 1

Presented by:-
Syed Shabbar Abbas Naqvi
Lecturer
Govt. College Of Technology
Jhang, Punjab, Pakistan
 DEPRECIATION
• It is decrease in value of physical properties with the passage of time and use.

Depreciation
6

5 Gradual decrease
in value over
4 passage of time
VALUE

0
Year 1 Year 2 Year 3 Year 4 Year 5
TIME
 DEPRECIATION
• Depreciation can be termed as…

• Operational cost OR

• Used value of an asset in a specific time period. OR

• Permanent, continual and gradual shrinkage in book value of as asset.

 1. Physical Depreciation: physical decay
Depreciation
Types of

2. Economic Depreciation : outdated technology

3. Accounting Depreciation: fall in worth of an asset

CAUSES OF DEPRECIATION

Physical

Due to
Functional
accident

Due to Causes of Due to

depletion Depreciation time factor

Due to
Technolog deferred
ical maintenan
ce
Monetary
 1. PHYSICAL DEPRECIATION

• It is the result of deterioration of an asset due to age and wear & tear. It results

from use, decay and the action of the elements.

• It is a constant factor. It begins as soon as an asset is exposed to the action of the

elements or is put into use.

 1. PHYSICAL DEPRECIATION

• It can be explained as…

• Deterioration due to action of elements

• Corrosion of pipes
• Rotting of timber
• Chemical decomposition

• Wear and tear charges

• Physical decay
 2. FUNCTIONAL DEPRECIATION

• It is the decrease in value of an asset provided as a result of lack of

adaptation to function.

• It is the reduction of usefulness or desirability of an asset because of an

outdated design feature that cannot be easily changed.

• It can also be related to upgradation of need. e.g. functions requirement from

any machinery/structure more than its capacity can lead to depreciation of

that.
 3. TECHNOLOGICAL DEPRECIATION

• It is due to advancement in technology.

• New invented resources for a function can make the already working

resource uneconomical and outdated.

• E.g. stream engines lost their value upon invention of petrol/diesel

engines.
4. DEPRECIATION DUE TO ACCIDENT

• Sometimes, asset loses its physical/technological characteristics due to

sudden failure or accident.

5. DEPRECIATION DUE TO DEPLETION

• It is termed as “consumption of an exhaustible natural resource to produce a

product or service is called depletion”.

• Removal of natural resource decreases value of the site.

Total cost − Residual cost

• Depletion cost per unit =
Total estimated units available

• Total Depletion = cost per unit x no. of units extracted

 6. MONETARY DEPRECIATION

• A change in price level decreases the value of the asset.

• If the price of an asset increases, it makes replacement of that asset more expansive.
 7. DEPRECIATION DUE TO TIME FACTOR

• Some assets lose their value after a particular time period.

• E.g. copyrights and patent rights may loose their value upon expiry of

time limit.
 8. DEPRECIATION DUE TO DEFERRED
MAINTENANCE
• No proper maintenance of any asset can bring loss to its value.

• Depreciation of that asset quickens up due to deferred maintenance. Life of asset is

decreased.
 PURPOSES OF DEPRECIATION

• To ascertain the true and fair profits

• To show the asset’s proper value

• To make arrangement of funds for replacement of fixed asset

• Ascertaining accurate cost of production

• To comply with legal provisions

• To avail tax benefits

 DEPRECIABLE PROPERTY
• A property that can be amortized or depreciated. It can be tangible or intangible.
• Land is never depreciated.
• A property is depreciated in following cases
• Th property must be used in a business or to produce income
• It must be something that looses its value. It should wear out, decay,
deteriorate or show depletion.
• Property must have specific life and that life must be more than one year.
 VALUE

• Depreciation is defined as decrease in value. So, understanding value if also very

important.

• It is defined as “Present Worth Of All The Future Profits That Are To Be Received
Through Ownership Of A Particular Property.”

• Different types of values are used in field. Some of them that will be helpful during
depreciation calculations are being discussed here.
 It is the estimated worth of an asset, based on how much a
Market Value buyer would be willing to pay the seller.

This is what the property is worth to the owner as an

Use Value operating unit.

It is the current value of the asset with respect to the asset's

Book Value useful life.

It is the estimated resale value of an asset at the end of its

Salvage Value useful life.

Value of asset if it is sold for junk. When the asset remains

Scrap Value of no use. Sometimes it is as same as salvage value

Value set by a third party to make it fair for both the seller
Fair Value and the buyer.
 NEXT LECTURE

• Method of Depreciation

• Straight Line Method

• Declining balance method

• Double declining balance method

• Sum of the years method

• Straight line to declining balance method

 THANKS…
Any Questions???

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You can find me at shabbar.199@gmail.com
For verbal elaboration of the topic with examples, you can visit my YouTube channel
https://www.youtube.com/channel/UCXC8T28HR22U5xK3pMjNOUQ