DEPRECIATION

ENGR. REY S.A. RIMANDO, CE RMP LPT

College Instructor II
CAMARINES SUR POLYTECHNIC COLLEGES
• Is the reduction or fall in the value of an asset
or physical property during the course of its
working life and due to passage of time.
• Applies only to fixed assets.
• Non-current (fixed) assets are gradually used up
in providing goods and services over time.
• Depreciation is a method of allocating cost.
• The portion of the cost allocated to a particular
accounting period is charged as an expense against
revenue (Matching principle).
• Purpose of accounting depreciation is to spread the
cost of a non-current (fixed) asset over its expected
useful life.
General Definition

• Depreciation is an accounting
process by which a company
allocates an asset’s cost
through its useful life
• Physical Deterioration – caused by physical wear and tear
(rust, rot and decay)
• Obsolescence – The process of becoming obsolete, outmoded,
or out of date.
• Depletion of fixed assets – an asset that depletes over time
as resources are extracted from it
• Passage of Time –
• Value - is the money worth of an asset or product. It is also
refers to the present worth of all future profits that are to be
received through ownership of a particular property.

• Market Value - is the amount of a willing buyer will pay to a

willing seller for a property where each has equal advantage
and neither one of them is under the compulsion to buy or sell.

• Book Value - Is the worth of the property as reflected in the

book of records of the company.
• Use value - is the amount of the property which the owner
believed to be its worth as an operating unit.
• Fair value - is the worth of the property determined by a
disinterest person in order to establish an amount which is
fair to both the buyer and seller.
• Salvage value - is the amount obtained from the sale of
property. Implies that the property will still be use for the
purpose it is intended.
• First Cost - is the delivered and installed cost of the asset
including purchase price, installation fees, and any other
depreciable cost.
• Recovery Period - is the depreciable life in “n” years.
• Depreciation rate or Recovery rate - is the fraction of the first
cost removed by the depreciation each year.
• Personal Property - is the income producing tangible
possessions of a corporation. Examples; vehicles,
manufacturing equipment, construction assets, etc.
• Real property - includes real state and all improvements, office
building, factories, warehouses, apartments and other
structures.
STRAIGHT LINE METHOD
STRAIGHT LINE METHOD
• Straight-line depreciation is a simple method for
calculating how much a particular fixed asset depreciates
(loses value) over time.
• The straight-line method of depreciation assumes a
constant rate of depreciation. It calculates how much a
specific asset depreciates in one year, and then
depreciates the asset by that amount every year after
that.
STRAIGHT LINE METHOD
STRAIGHT LINE METHOD
• How to calculate straight-line depreciation
• You need three numbers to calculate straight-line
depreciation for a fixed asset:
• The total purchase price of the asset (the cost of the
asset including shipping, taxes, installation fees, etc.)
• Its scrap or salvage value of the asset—the price you
think you can sell it for at the end of its useful life.
• The useful life of the asset—how many years you think it
will last.
 Allocates the cost of the asset to expense
evenly over years asset is used.
 The life of the asset is measured in years.

𝐶𝑜𝑠𝑡 − 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒

𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐿𝑖𝑓𝑒
STRAIGHT LINE DEPRECIATION
• Is considered the standard against which any depreciation method is
compared. It derives its name from the fact that the book value declares
linearly with time.

• Annual Straight Line Depreciation -Book value after “t” years of service
FC  SV D FC  SV BV  FC  Dt
d i Dt  t
n FC n

Where: FC= First Cost

n= Recovery period
SV= Salvage Value
BV= Book Value
Dt= Total depreciation after “t” years
Practice Problems:
• Company F purchased a machine that cost 50,000 and it
will last for 5 years. A salvage value was not assigned to
the asset.
Practice Problems:
A steel cabinet which cost ₱ 8,500 is expected to last 12
years, and at that time will have a trade-in-value of ₱ 500.
Find the annual depreciation charge.
Practice Problems:
• A machine which costs ₱ 12,000 and after 6 years has a
salvage value of ₱ 900. Determine the yearly depreciation
and prepare a depreciation schedule.
Practice Problems:
• A machine which costs ₱ 12,000 and after 6 years has a
salvage value of ₱ 900. Determine the yearly depreciation
and prepare a depreciation schedule.
Practice Problems:
• An item costing ₱ 7,400 depreciates to ₱ 700 in 10 years.
What is the annual depreciation?
Practice Problems:
• A stereo set which costs ₱ 14,800 is expected to last 8
years, and at that time will have a trade-in-value of ₱
1,800. Find the yearly depreciation charge and prepare a
depreciation table.
Practice Problems:
• An office equipment costing ₱ 42,000 depreciates to ₱
11,500 in 10 years. What is the annual depreciation and
prepare a depreciation schedule.
Practice Problems:
• A machine has an initial cost of P50,000 and a
salvage value of P10,000 after 10 years. Find the
book value after 5 years using straight line
depreciation.
Practice Problems:
• The cost of equipment is P500,000 and the cost of
installation is P30,000. If the salvage value is 10% of the
cost of equipment at the end 0f 5 years. Determine the
book value at the end of fourth year. Use straight line
depreciation.
 Practice Problems:
• A machine has an initial cost of P50,000 and a salvage
value of P10,000 after 10 years. What is the straight
depreciation rate as a percentage of the initial cost?
SINKING FUND METHOD
SINKING FUND METHOD
• method of calculating depreciation for an asset in which apart from
calculating depreciation,
• it also keeps aside a fund for replacing the asset at the end of its
useful life.
• used when the assets that need to be replaced are of high cost.

To avoid paying for the replacement of assets at a time, companies

maintain a sinking fund that will help them recover the cost of the asset while
also accounting for its depreciation.
Sinking fund method is put into use by large scale industries such as
utility industries that have a requirement for expensive long-term assets to
function.
Sinking Fund Benefits
1. It will improve the company finances: As the economic situation of a
company will not be the same, the need for replacing a high value asset can be detrimental to
the company’s financial position. By having a sinking fund, the company can cover those
expenses, and it will keep the investors confident about the company.
2. Brings Investment: Companies with a high level of debt are deemed as risky,
but a sinking fund instils confidence in the investors and can bring in further investment.
3. Lower Interest Rates: Companies with a sinking fund can get investment for low
interest rates.

This was all about Sinking Fund Method. The concept

presented in this article will be helpful for students in
developing the knowledge of the Sinking Fund, and it’s
uses.
Formula
1
 (1  i)  1 n
d  (FC  SV)  
 i 
 i   (1  i)m  1
d  FC  SV 
 n

 dm  d  
 (1 i) 1 
 i 
Example:
A transformer costs ₱ 150000 and has a useful life of 25
years. If the scrap value of the transformer is 10000 and
the rate of annual compound interest is 7%%. Then,
calculate the amount to be saved annually for the
replacement of the transformer after the end of 25 years.
Example:
An equipment costs ₱10,000 with a salvage value of ₱ 500
at the end of 10 years. Calculate the annual depreciation
cost by sinking-fund method at 4% interest.
SUM-OF-THE-YEARS-DIGIT
(SOYD) METHOD
SOYD Method
• Sum-of-the-years' digits (SYD) is an accelerated method
for calculating an asset's depreciation.
• This method takes the asset's expected life and adds
together the digits for each year; so if the asset was
expected to last for five years, the sum of the years' digits
would be obtained by adding: 5 + 4 + 3 + 2 + 1 to get a
total of 15.
• Each digit is then divided by this sum to determine the
percentage by which the asset should be depreciated
each year, starting with the highest number in year 1.
Formula
 n 
d  (FC  SV)  
 years 
 n  m  1
dm  (FC  SV)  
 years 
Example:
ABC Company purchases a machine for $100,000. It has
an estimated salvage value of $10,000 and a useful life of
five years. The sum of the years' digits depreciation
calculation is: