DEPRECIATION

Depreciation is an accounting method of

allocating the cost of a tangible or physical
asset over its useful life or life expectancy.

Depreciation represents how much of an

asset's value has been used up.
 KINDS OF DEPRECIATION

Physical Depreciation Functional / Economic

• Wear and tear • Inadequacy
• Passage of time • Supersession
• Action of elements • Obsolescence
• Casualty or accident
• Disease or decay
 DEPRECIATION
• COST – refers to its original price.
• EXPECTED LIFE – refers to the useful life of an asset which
depends upon how long it is expected to be used, its age when
required, policies as to repairs and maintenance and, perhaps,
even the climate in which it is used.
• SALVAGE VALUE – refers to the amount to be recovered
through sale or other disposition of the asset at the time it is
retired from service.
• BOOK VALUE of an asset refers to its value at any given time
within its expected life span.
 TOTAL DEPRECIATION = COST – SALVAGE VALUE

D=C-S
Example:
The original cost of an asset is P 500, 000 and its annual depreciation is P 10, 000. Table A
below show its depreciation at the end of each year for its five years.
 STRAIGHT-LINE METHOD
Depreciating assets using the straight-line method is typically the
most basic way to record depreciation. It reports equal
depreciation expense each year throughout the entire useful life
until the entire asset is depreciated to its salvage value.

Annual Rate of Depreciation, the formula is: r=d/C

For book value of an asset at the rate of any given period n within its
estimated life, and number of years at the end of a period, the formula is:
Vn = C(1 – rm)
STRAIGHT-LINE METHOD
Example: An asset which will last for 25 years costs P 1,250, 800. If its salvage value is P
45,000, find the following using straight-line method of depreciation: (a)Total Depreciation
(b) Annual Depreciation (c) Annual Rate of Depreciation (d) book value after 5 and 15
years
Given : C = P 1,250, 800 Solution :
S = P 45, 000 a. Total Depreciation
t = 25 years D=C–S
= P 1, 250,800 – 45, 000
= P 1, 205, 800

b. Annual Depreciation
d=D/t
= P 1, 205, 800 /
25
= P 48, 232
STRAIGHT-LINE METHOD
Example: An asset which will last for 25 years costs P 1,250, 800. If its salvage value is P
45,000, find the following using straight-line method of depreciation: (a)Total Depreciation
(b) Annual Depreciation (c) Annual Rate of Depreciation (d) book value after 5 and 15
years
c. Annual rate of depreciation d. Book value after 5 and 15 years
r = (d / C)* 100%
= (P 48, 232 / 1, 250, 800)*100% V5 = C (1-rm)
= 3.86% = P 1, 250, 800 ( 1 – (3.86% x 5)
= P 1, 009, 640

V15 = C (1-rm)
= P 1, 250, 800 ( 1 – (3.86% x 15)
= P 526, 586. 80
STRAIGHT-LINE METHOD
Example: Prepare a five depreciation schedule for Example 1 above:
 DECLINING-BALANCE METHOD
The declining balance method is an accelerated depreciation method. This
method depreciates the machine at its straight-line depreciation percentage
times its remaining depreciable amount each year. Because an asset's
carrying value is higher in earlier years, the same percentage causes a
larger depreciation expense amount in earlier years, declining each year.

If the expected life, cost and rate are given, we shall calculate the book
value using:
Vn = C(1 – r)^n
Annual Rate of Depreciation, the formula is: r = 1-(S/C)^1/t
DECLINING-BALANCE METHOD
Example: An equipment worth P 24 800 can be sold for P 3, 500 at the end of its useful life
of 8 years. Find the : (a) Annual Rate of Depreciation (b)Total Depreciation (c) book value
at the end of 6th year
b. Total Depreciation
Given : C = P 24, 800 D=C–S
S = P 3, 500 = P 24, 800 – 3, 500
t = 8 years = P 21, 300

Solution: c. Book value at the end of 6th year

a. Annual rate of depreciation V6 = C (1-r)^6
r = 1 - (S / C)^1/8 * 100% = P 24, 800 ( 1 – 0.2171)^6
= (P 3, 500 / 24, 800)^ 1/8 * 100% = P 5, 710.70
= 21.71%
DECLINING-BALANCE METHOD
Example 2: An equipment was purchased at P 60, 000. It has a salvage value of P 5, 000
with the useful life of 5 years. Find the rate of annual depreciation and prepare a
depreciation schedule:

Given : C = P 60, 000

S = P 5, 000
t = 5 years

Solution:
a. r = 1 – (5, 000/ 60, 000)^1/5 *
100%
= (1 – 0.60836) x 100%
= 39.164%
 DOUBLE-DECLINING-BALANCE METHOD
The double-declining balance (DDB) method is another accelerated
depreciation method. After taking the reciprocal of the useful life of the asset
and doubling it, this rate is applied to the depreciable base, book value, for
the remainder of the asset’s expected life.

For example, an asset with a useful life of five years would have a reciprocal
value of 1/5 or 20%. Double the rate, or 40%, is applied to the asset's
current book value for depreciation. Although the rate remains constant, the
dollar value will decrease over time because the rate is multiplied by a
smaller depreciable base each period.
 SUM OF THE YEARS METHOD
The sum-of-the-year’s-digits (SYD) method also allows for
accelerated depreciation. To start, combine all the digits of the
expected life of the asset. For example, an asset with a five-year
life would have a base of the sum of the digits one through five,
or 1+ 2 + 3 + 4 + 5 = 15. In the first depreciation year, 5/15 of the
depreciable base would be depreciated. In the second year, only
4/15 of the depreciable base would be depreciated. This
continues until year five depreciates the remaining 1/15 of the
base.
 SUM OF THE YEARS METHOD
Example: A Toshiba laptop costs P 120, 000 with an estimated life of 10 years. If its
salvage value is P 10,000, compute the annual depreciation for each year’s specified
estimated life. Prepare the depreciation schedule

Given : C = P 120, 000 Solution:

S = P 10, 000 a. Total Depreciation
t = 10 years D=C–S
= P 120, 000 – 10, 000
= P 110, 000

The constant denominator:

1+2+3+4+5+6+7+8+9+10 = 55
The declining denominator:
10,9,8, 7, 6, 5, 4, 3, 2, 1
 SUM OF THE YEARS METHOD
The annual depreciation are computed as follows:
SUM OF THE YEARS METHOD

From the depreciation schedule,

it is shown that the last entry
(P 10, 000.00) in the book value
is equal to its salvage value
(P 10,000.00).