1. By,
Saran raj S L
Chenthylathiban S K
Jeeviga J
Preethy S
Manisha Susan

2. 
DEFINITION
Depreciation is a non – cash expense that reduces the value of an
asset over a period of time

Reason for asset depreciation
◦ Wear and tear of machinery
◦ Obsolescence – value gets depreciated due to replacement of newer models

Methods for calculating depreciation
◦ Straight line method
◦ Sum of years depreciation
◦ Declining balance calculation

3. 
Straight line method
Straight line method depreciates cost evenly through out the useful
life of the fixed asset.

Formula
Depreciation per annum = (Cost – Salvage value)
Useful life

Salvage value – The estimated value that an asset will realize upon its sale
at the end of its useful life. Company

4. 
Example
Cost of the asset
10500
Less: salvage value
500
Depreciable cost
10000
Years of estimated useful time (in yrs)
5
Depreciation = 10500 – 500
5
= Rs. 2000

5. 
Sum of year’s method
◦ Accelerated depreciation technique
◦ based on the assumption that assets are more productive when they are
new and productivity decreases with time

Formula
Depreciation = depreciation base * remaining useful life
sum of year’s digits

Example
Cost of the asset – Rs. 45000
Salvage value – Rs. 5000
Useful life – 4 years

6. 
Calculation
Year Depreciation
base (Rs)
Depreciation Depreciation
factor
expense
Accumulated
depreciation
1
40000
4/10
16000
16000
2
40000
3/10
12000
28000
3
40000
2/10
8000
36000
4
40000
1/10
4000
40000
Depreciation factor = n(n+1)
2
= 4*5
2
= 10

7. 
Reducing balance method
◦ Reducing Balance Method charges depreciation at a higher rate in the
earlier years of an asset.
◦ The amount of depreciation reduces as the life of the asset progresses.
◦ Depreciation under reducing balance method may be calculated as
follows:
◦ Depreciation per annum = (Net Book Value - Residual Value) x Rate%

8. 
Example
o
o
o
o
o
An asset has a useful life of 3 years.
Cost of the asset is $2,000.
Residual Value is $500.
Rate of depreciation is 50%.
Depreciation expense for the three years will be as follows:

9. 

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
Definition
Amortization is known as the paying off of debt in regular instalments over
a period of time.
Amortization is also known as the deduction of capital expenses over a
specific period of time (usually over the asset's life).
Measures the consumption of the value of intangible assets, such as a
patent or a copyright.
Example
borrowing amount – Rs. 100000
payment – monthly payment for 30 years

10. 


Write off is a reduction in the value of an asset or earnings by the
amount of an expense or loss.
For example:
- when an account receivable cannot be collected,
- or when inventory is obsolete,
- when there is no longer any use for a fixed asset,
- or when an employee leaves the company and is not willing to pay
the company back for a pay advance.
The general concept is to credit the asset account and debit an
expense account.

11. 
Also called as sinking fund or amortization fund

Definition
◦ A fund set up by a company to provide money to buy new fixed assets.

◦ Every year the company invest certain amount that is equal to existing
asset’s depreciation value
◦ This facilitates the company to use the money to buy new assets
Formula
Annual depreciation charges = ((C-R)/((1+i)n-1)/i)
C – cost of asset
R – residual value
i – interest rate
n – no of years

12. 
Example
An asset has Rs.21,000 of original cost, Rs.1,000 of residual value, and 5
year of useful life. The annual interest for money earned is 5%.
Depreciation charge = ( 21,000 - 1,000)/((1+5%)5 - 1)/5%)
= 20,000/5,52563
= Rs. 3,619.50
 Depreciation schedule

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http://www.investopedia.com/articles/fundamental/04/090804.asp
http://accounting-simplified.com/financial/fixed-assets/depreciationmethods/straight-line.html
http://www.accountingcoach.com/online-accounting-course/11Xpg01.html
http://accounting-simplified.com/financial/fixed-assets/depreciationmethods/declining-balance.html
http://www.investopedia.com/terms/a/amortization.asp
http://banking.about.com/od/loans/a/amortization_calculations.htm
http://www.investopedia.com/terms/w/write-off.asp
http://www.accountingtools.com/dictionary-write-off
http://www.investopedia.com/terms/s/sinking-fund-method.asp
http://www.accountingexplanation.com/sinking_fund_method_of_deprecia
tion.htm
http://www.varieart.com/article272-Calculating-Depreciation-Using-theSinking-Fund-or-Interest-Computing-Method