Date: 11/08/2012

DEPRECIATION Physical asset ---value decreases---with age Reasons: Physical deterioration (wear & tear) Technological advances Economic changes Depreciation: Definition-reduction in value of an asset due to any of the above reason Asset---equipment, machinery, building, structures, etc. Depreciation---must be considered during cost-profit analysis

 Depreciation ---cost incurred for the use of an asset over the certain time period (mostlyuseful life period) Intent of depreciation---to allow the business to recover the cost of an asset over time period Depreciation---begins when asset is placed in service and ends when asset cost is fully recovered or asset is retired from service (whichever occurs first) Cost due to depreciation = (original value of asset) (value of same asset at end of depreciation period) Depreciation charges---must be included as an operating charges incurred

 Purpose of depreciation as cost: Allows realistic evaluation of profits Provides basis for determining of income taxes Provides means whereby funds are set aside regularly to provide recovery of invested capital Types of Depreciation: 1. Physical Depreciation: Decrease in value due to changes in physical aspects Causes : wear & tear, corrosion, accidents, deterioration due to age---due to this redutcion in its service efficiency 2. Functional Depreciation:

 One common type--- Obsolescence Obsolescence --- decrease in value due to technological advances, development, superior quality, etc. Causes of Obsolescence: i. Product Obsolescence: Due to development & marketing of cheaper or better substitutes e.g. -----? ii. Equipment Obsolescence: Due to improvements in equipment design e.g. -----? iii. Process Obsolescence: Due to advancements in process technology iv. Capacity Obsolescence: Batch to continuous process

v. Decrease in demand vi. Shift of population vii. Changes in public requirements viii. Termination of particular need ix. Abondonment of enterprises Physical losses----easier to evaluate --- than functional losses Both must be considered---for fair allowances for depreciation Depletion: Capacity loss due to material actually consumed Depletion cost = (initial cost) (amount of material used) (amount of material purchased) Applicable to natural resources ..(e.g.----?)

 Costs for Maintenance and Repairs: Costs paid for constantly keeping the asset in good condition Costs paid for replacing worn out parts of property These---directly referred as operating cost---should not be confused with depreciation cost Extent of these costs --- may affect on depreciation cost(how.?)

Service Life: Economic or useful life of property Period during which use of property is economically feasible While estimating service life --- assumed that reasonable amount of maintenance and repairs carried out --- at expense of property owner

 Most of times --- its based upon past records --- but no certainty that future conditions will remain same Salvage Value: Net amount of money ---obtainable from sale of used property over & above any charges involved in removal or sale May be high for properties capable of further service Getting high salvage value --- not really true because certain other factors may affect on it --- e.g. location of property, existing price level, market supply, demand, difficulty in dismantling, etc.. If property ---- cant be disposed as useful unit --- dismantled and sold as junk --- used again for manufacturing raw material --amount obtained from such disposal ---- scrap or junk value

 Present Value / Book Value: Also known as unamortized cost Difference between original cost of property and all depreciation charges made to date Market Value: Price which could be obtained from an asset if it is placed for sale in open market --- provided, asset in good condition Replacement Value: Cost necessary to replace an existing property at any given time with one at least equally capable of rendering same service.

 Methods for Determining Depreciation: Many methods available General classification --(A) Arbitrary Methods: giving no considerations to interest costs (B) Methods taking into account interest on investments (A) (i) Straight Line Method (ii) Declining Balance Method (iii) Sum of the Years Digit Method (B) (i) Sinking Fund Method (ii) Present Worth Method