THE UNIVERSITY OF GOROKA

INSTITUTE OF TVET
DIVISION OF TOURISM & HOSPITALITY
TTM 317: PURCHASING AND COST CONTROL

TOPIC:
DEPRECIATION
Outline of the presentation
Overview & introduction
Factors Affecting Depreciation
Methods Of Charging
Depreciation
Conclusion
Referencing
 Introduction
Depreciation is an everyday- used terminology in the
business settings which, means the reduction in the
value of goods (assets) in relations to factors such as
time usage and etc.

In business context, Depreciation

means decreases in the monetary
value of an asset over time due to
the use, wear, and tear or
obsolesce.
In other words, it is the method
to allocate the cost of an asset
over its useful life. Depreciation
is always charged on the cost
price of the asset and not on its
market price. It is charged
every year to the extent of the
depreciable amount.
Based on this, there are two sub-topic
that we will further discuss and they
are:

1.Factors affecting Depreciation, &

2.Methods of charging depreciation
1. Factors Affecting Depreciation
According to Sharmasalus ,
there are three (3) main
factors that contributes to
depreciation.

1.Cost of the Asset

2.Estimated Useful Life &
3.Estimated Scrap Value
 1. Cost of the Asset
The cost of asset include the
purchase price, less any trade
discount plus all the costs essential
to bring the asset to a usable
condition. In other word, the total cost
of asset includes from purchase price
to the installation.
 2. Estimated useful life
An asset can not work forever. Every asset
has a certain working and useful life. The
longer the working life, the amount of
depreciation will be lower and vice verse.
Therefore, the useful life of an asset is
generally to be taken in terms of asset's
expected use. This estimated useful life of
asset determines the rate or the amount of
depreciation.
 3. Estimated Scrape value
Scrap value refers to the value
estimated to be realized after the
expiry of the useful working life of the
asset. This is also known as residual
value or salvage value. Depreciation
should be determined after deducting
the estimated scrap value from the cost
of asset.
 2. Methods Of Charging Depreciation
(Ashok M, nd)

1. FIXED 8. MACHINE
INSTALMENT HOUR RATE
METHOD
2. DIMINISHING
BALANCE
METHOD Different 7.
Methods Of DEPLETION
METHOD
Charging
3. ANNUITY Depreciation Text

METHOD 6. REVALUATION
METHOD

4. DEPRECIATION 5. INSURANCE
FUND METHOD POLICY
METHOD
 1. Straight Line or Fixed
Installment Method
This is the oldest and
simplest method of charging
depreciation. The life of the
asset is estimated and
depreciation is written off
equally over the life of an
asset.
The amount of depreciation is
calculated as follows:
Amount of depreciation = Original
cost – Residual/ scrap value

Rate of Depreciation (%)=

[amount of depreciation/
original cost] ×100
2. Diminishing Balance
Method

The depreciation is charged as a

fixed percentage on the
diminishing balance of the asset
given charging depreciation,
hence the name diminishing
balance. The amount of
depreciation goes on decreasing
every year.
The amount of depreciation
and repairs charged to profit
and loss account remains
almost the same because
depreciation decreases every
year and expenditure on
repairs increases with the
passage of time.
 3. Annuity Method
Unlike the two earlier
discussed methods, no
attention is given to the
interest earned. Annuity
method considers both the
value of asset and the amount
of interest.
The interest is taken on debit
balance of the asset. On the
other hand, it is useful for
assets requiring considerable
amount of capital but do not
require additions or frequent
replacements e.g., long leases
assets, etc.
 4. Depreciation fund method
This method provides funds for
the replacement of the asset at
the end of its servicing life. The
amount of depreciation is
credited to an account called
Sinking Fund or Depreciation Fund
account which is shown on the
liabilities side of the balance
sheet.
This amount is invested in outside
securities.
Every year the amount set aside for
depreciation along with the interest is
again invested. The amount so
invested is debited to an account
known as Sinking Fund Investment
Account and these investments are
shown as an asset in the balance
sheet. The amount of depreciation
remains the same for the year.
 5. Insurance Policy Method
This method is almost similar
to Depreciation Fund Method.
In depreciation fund method if
investments are sold at a loss
then the aim of replacement
will be adversely affected.
Insurance policy method
overcomes this drawback. In
this method an insurance
policy is purchased for the
value of the asset. This
policy is taken up for the life
of the asset and it matures at
a time when the asset is to
be replaced.
 6. Revaluation Method
In this method the amount of
depreciation is calculated by
revaluing the asset at the end of
each year. The difference between
the value of the asset at the
beginning and the end of the
period is taken as depreciation.
 7. Depletion Method
This method is specially used
for those assets which deplete
with use. The cost of the
assets is divided by total
workable deposits.

This method is suitable for

mines, quarries, sandpits, etc.
8. Machine Hour Rate Method

The life of the asset is estimated

in hours. The value of the asset
minus scrap value is divided by
the estimated number of hours. In
this way a machine hour rate is
calculated. Machine hour rate
determines the amount of
depreciation per hour.
The number of hours a machine
runs in year is multiplied by the
machine hour rate and the amount
of depreciation to be taken in that
year is calculated. This method is
considered more scientific and
precise than either the fixed
installment method or the
reducing balance method.
 Conclusion
Depreciation is the fall in
value of all fixed assets over
time in the process of its
usage.
 Factors affecting
depreciation are; cost of
assets, estimated useful
life and estimated scrape
value.
 Methods that involves in
charging depreciations are;

Fixed Installment, Diminishing

Balance Method, Annuity
Method, Depreciation, Fund
Method, Insurance Policy
Method, Revaluation Method,
Depletion Method, and Machine
Hour Rate Method
All in all, everything we
see around us has a
useful life because it is
being used up little by
little every day or will
become outdated as
they go through those
forces mentioned.
 References
1. Ashok M (n.d). Top 7 Methods of Charging
Depreciation. https://www.accounting notes.net
2. Sharmasalus (n.d). Depreciation:
Features, Causes, Factors and Need:
Factors affecting Depreciation.
https://www.geeksforgeeks.org
The
end!