Depreciation

Dr Hemlata Karne
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Depreciation

▪ Meaning of depreciation

▪ Physical Asset

▪ Decrease in value - physical deterioration,

technological advances, economic changes, or
other factors

▪ distributing the original expense for a physical

asset over the period
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Depreciation

▪ Decrease in value of property with time

▪ Example - equipment had been put into use

10 years ago

▪ total cost of $31,000

▪ equipment is now worn out and is worth

only $1000
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Depreciation

▪ Depreciation is the original or new value of

a property minus the value of the same
property at the end of the depreciation
period

▪ original value is usually taken as the total

cost of the property at the time it is ready for
initial use
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Depreciation

▪ Engineer cannot wait until the end of the

depreciation period to determine the
depreciation costs

▪ it is necessary to estimate the final value of

the property as well as its useful life.
 Purpose of
Depreciation

Profits Income tax

earned benefits

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Types of depreciation

Physical depreciation

Functional depreciation
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Physical Depreciation

▪ Due to changes in the physical aspects

▪ Causes of physical depreciation- Wear and

tear, corrosion, accidents, and deterioration
due to age or the elements

▪ Serviceability of the property is reduced

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Functional Depreciation

▪ Due to all other causes

▪ Technological advances

▪ Developments which make an existing

property obsolete

▪ No physical change, its economic

serviceability is reduced
Causes of Functional depreciation

1)Change in demand
2)Shift of population
3)Changes in requirements of public
authority
4)Insufficient capacity
5)Termination of the need for the type
of service rendered
6)Abandonment of the enterprise
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Costs for Maintenance & Repair

▪ Maintenance - keeping a property in good

condition

▪ Repair - replacing or mending of broken or

worn parts of a property

▪ Useful life of any property ought to be

increased if it is kept in good condition
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Service Life

▪ period during which the use of a property is

economically feasible

▪ physical and functional depreciation are

taken into consideration

▪ economic or useful life

▪ assumed that a reasonable amount of

maintenance and repairs will be carried out
Depletion -Capacity loss due to materials
actually consumed is measured as depletion

location of the
Salvage Value- the net property, existing
amount of money price levels, market
obtainable from the sale supply and demand,
and difficulty of
of used property dismantling
Scrap or Junk Value -
dismantled and sold as
junk

Present Value -the

value of the asset in its
condition at the time of
valuation

Book Value -The difference

between the original cost of
a property, and all the
depreciation charges made
to date
Market Value -price which could
be obtained for an asset if it were
placed on sale in the open market

Replacement Value- The cost

necessary to replace an existing
property at any given time