DEPRECIATION

*Systematic allocation of the depreciable amount of an

asset over its useful life.
Depreciation in the financial statements

* Recognized as an expense which may be a part of the cost of

goods manufactured or an operating expense.
Kinds of Depreciation

*Physical Depreciation-related to the depreciable asset’s wear and tear and

deterioration over a period.

*Functional or Economic Depreciation-arises from obsolescence or inadequacy of the

asset to perform efficiently.
Depreciation Period

■ Depreciation of an asset begins when it is available for use and

ends when the asset is derecognized.
Factors of Depreciation

Depreciable Amount or Depreciable Cost-cost of an asset less its residual value.

Residual Value-estimated worth of the asset in pesos at the end of its useful life.

Useful Life-expected period of use of the asset or the number of units expected to be
obtained from the asset
Methods of Depreciation

1. Equal or Uniform Charge Methods

2. Variable charge or the use-factor methods
3. Decreasing charge or accelerated or diminishing balance methods
4. Other methods
Equal or Uniform Charge Methods

■ *Straight line
■ *Composite Method
■ *Group Method
Straight Line Method

■  Adopted when the principal cause of depreciation is passage of time.

■ Annual Depreciation =
■ Annual Depreciation = Depreciable Amount multiplied by straight line rate

*Straight line rate=100%/life of the asset in years

Illustration

■ The following data relate to an equipment acquired.

Equipment Php 100,000
Residual Value 10,000
Useful Life 6 years
Using the formula:

■  Annual Depreciation =
=
=
= Php 15,000
To record the annual depreciation:
Depreciation 15,000
Accumulated Depreciation 15,000
Composite Method

■ *Assets that are dissimilar in nature and vary widely in useful life are grouped and
treated as a single unit.
Composite life- total depreciable amount/total annual depreciation
Composite rate-total annual depreciation/total cost
Illustration:

Asset Cost Residual Value Depreciable Life in Annual

Amount Years Depreciation
Building 650,000 50,000 600,000 15 40,000
Machinery 220,000 20,000 200,000 8 25,000
Equipment 130,000 30,000 100,000 4 25,000
1,000,000 100,000 900,000 90,000
The entry to record the annual depreciation is
Depreciation 90,000
Accumulated Depreciation 90,000

■ At the end of the financial period, the PPE account would appear as follows:
Building 650,000
Machinery 220,000
Equipment 130,000
Total 1,000,000
Accumulated Depreciation (90,000)
Carrying Amount 910,000

(Refer to page 768 for the continuing illustration)

Group Method

■ Assets that are similar in nature and in estimated useful life are grouped and treated as a
single unit.
Illustration

■ PJDC
  Company purchased on January 1, 2021 one hundred similar machines at a total
cost of Php 1,000,000 with estimated useful life of five years. Compute for the annual
depreciation the company should record for the machines for the year 2021.

Using the formula for the straight line method:

Annual Depreciation =
= Php 200,000
The company will record the annual depreciation of the machines in its books as follows:

Depreciation 200,000
Accumulated Depreciation 200,000
Variable charge or activity methods
(Function of use)
■ *Working hours method
■ *Output or production method

(Refer to pages 770-771 for the illustration)

Decreasing charge or accelerated
methods
■ Sum of years’digits
■ Declining balance
■ Double declining balance
Sum of years’ digits

■ Depreciable
  amount multiplied by series of fractions whose numerator is the digit in the
useful life of the asset and whose denominator is the sum of the digits in the useful life
of the asset
■ SYD= Life (
*SUM OF HALF YEARS’ DIGITS
(multiply the useful life by 2 to get the useful life in half years)
(Refer to pages 774-775 for the illustration)
Declining Balance Method

■  Fixed or uniform rate is multiplied by the declining carrying amount of the asset
■ Fixed Rate Formula
■ Rate=1- n

(Refer to page 777 for the illustration)

Double Declining Balance Method

■ The straight line rate is doubled to get the fix rate

(Refer to page 779 for the illustration)

Inventory Method

■ Difference between the beginning balance of the asset account and the ending value is
the depreciation for the year
■ Depreciation is credited directly to the asset account, no accumulated depreciation is
maintained
(Refer to page 781 for the illustration)
Retirement Method

■ *Depreciation is recorded by the time the asset is retired

■ Amount of depreciation is equal to original cost of the asset retired minus salvage
proceeds

(Refer to pages 782-783 for the illustration)

Replacement Method

■ *Depreciation is recorded by the time the asset is retired and replaced

■ Amount of depreciation is equal to replacement cost of the asset retired minus salvage
proceeds

(Refer to pages 782-783 for the illustration)