Depreciation

C K Biswas
Dept of ME

Learning objectives
1. Definition of depreciation
2. To calculate the depreciation of assets
3. Types of depreciation methods and their
application
i. Straight line method
ii. Reducing balance method
iii. Sum of the years digit method
iv. Sinking fund method
v. Machine hour method
vi. Production unit method
vii. Annuity charging method
viii.Depletion method

Definition
It is the allocation of the
depreciable amount/ mon
ey of an asset over its esti
mated life.

Depreciation Methods
Types of depreciation methods and their applicatio
n
A.
B.
C.
D.
E.

Straight line method

Reducing balance method
Sinking fund method
Sum of the years digit method
Machine hour method

(A) Straight Line Method

Depreciation is computed by dividing the deprecia
ble amount of the asset by the expected number o
f accounting periods of its useful life.
Depreciation = Cost of Asset Estimated Residual
Value
Estimated Useful Economic Life

Example
Cost of assets
Residual value
Useful life

Rs10,000
Rs256
4 years

Annual depreciation
= 10000-256
4
=Rs2,436

(B) Reducing Balance Method / Dim

inishing Balance Method
Reason
Greater benefit is to be obtained from the early years of usi
ng an asset
Appropriate to use the reducing balance method which cha
rges more in the earlier years.

S= scrap value
C=initial cost
n= useful life

Example
Cost of assets
Residual value
Useful life

60%

Rs10,000
Rs256
4 years

Annual Depreciation

Annual Depreciation

= (Cost Accumulated Depreciation) x Depreciation Rate

Year 1

10,000 x 60%

= Rs6,000

Year 2

(10,000 6,000) x 60%

= Rs2,400

Year 3

(10,000 8,400) x 60%

= Rs 960

Year 4

(10,000 9,360) x 60%

=Rs 384

Salvage value

=Rs 256

Initial cost

=Rs10,000

(C) Sinking Fund Method

An depreciation fund equal to the actual loss in value of t
he asset is estimated taking into account the interest rate
.
S= scrap value
C=initial cost
n= useful life
i=interest rate

Example
Cost of assets
Rs10,000
Residual value
Rs256
Annual interest rate
10%
Useful life
4 years

per year

(D) Sum of Digits Method / Sum of T

he Years Digits Method
It provides higher depreciation to be charged in the earl
y years, and lower depreciation in the later periods.
Sum of digits =

n = Useful economic life (number of

years)

Depreciation in Year 1 =
Depreciation in Year 2 =
Depreciation in Year 3 =
Depreciation in Year n =

With
diminishing
years of life
to run

Example
Cost of assets
Residual value
Useful life

Rs10,000
Rs256
4 years

Sum of digits =
Depreciation in Year 1 =
Depreciation in Year 2 =
Depreciation in Year 3 =
Depreciation in Year 4 =

(E) Machine hour method

Depreciation is computed with reference to th
e use or output of the asset in that period.

Depreciation
fund= Cost-Scrap
Life of machine= Annual usage x Useful life
Depreciation charge = per hr

Example
Cost of machine
Rs10,000
Scrap value
Rs256
Annual usage of m/c 2000 hrs
Useful life
4 years

Depreciation
fund= Cost-Scrap = 10000-256
Life of machine= Annual usage x Useful life = 2000
x 4 hr
Depreciation charge = per hr
= = Rs 1.218 per hr
= 1.218 x 2000 hrs
=Rs 2,436 per year

Comparison
Redu Sink Sum
year St line bal
Fund Digit
0

Mc hr

10000 10000 10000 10000 10000

7564 4000 7900

6103

7564

5128 1600 5801

3180

5128

2692

640 3701

1232

2692

256

256 1602

258

256