DEPRECIATION
DEPRECIATION
- is the reduction of fall in the value of an asset or physical
property during the course if its working life and due to the passage of
time.
Types of Depreciation:
A.) Physical Depreciation is due to the reduction of the physical ability
of an equipment or asset to produce results.
B.) Functional Depreciation is due to the reduction in the demand for
the function that the equipment or asset was designed to render.
• Methods of Computing Depreciation: Variable to be used:
1. STRAIGHT LINE METHOD 𝑪𝒐 - First cost/Original cost
2. SINKING FUND METHOD 𝑪𝑳 - Value at the end of
3. DECLINING BALANCE METHOD life/Salvage Value/Scrap value
4. DOUBLE DECLINING BALANCE METHOD 𝑪𝒏 - Book value at the nth year
5. SUM OF THE YEARS-DIGITS METHOD 𝑫𝒏 - total depreciation up to n
years
d – annual depreciation
/depreciation charge during the
year
L – useful life of a property in years
• STRAIGHT LINE METHOD
- In this method of computing depreciation, it is assumed that
the loss in value is directly proportional to the age of the equipment or
asset.
𝐶𝑜 − 𝐶𝐿
𝑑=
𝐿
Book Value – sometimes called depreciated book value, is the worth of
a property as shown in the accounting records of an enterprise.
𝐶𝑛 = 𝐶𝑜 − 𝐷𝑛
• Sample Problem
1.) An equipment costs P 95,000 and has an estimated salvage value of
P 8,000 at the end of its 10 years lifetime. What would be the book
value after three years? using the straight-line method.
2.) A machine has an initial cost of P 50,000 and a salvage value of P
10,000 after 10 years. Find the book value after 5 years using straight-
line method of depreciation.
3.) A unit of welding machine cost P 45,000 with an estimated life of 5
years. Its salvage value is P 2,500. Find its depreciation rate by straight-
line method.
• SINKING FUND METHOD
- in this method of computing depreciation, it is assumed that a
sinking fund is established in which funds will accumulate for
replacement purposes.
(𝐶𝑜 − 𝐶𝐿 )(𝑖)
𝑑=
(1 + 𝑖)𝐿 −1
𝑑 (1 + 𝑖)𝑛 −1
𝐷𝑛 =
𝑖
𝐶𝑛 = 𝐶𝑜 − 𝐷𝑛
• Sample Problem
1.) A broadcasting corporation purchased equipment for Php 55,000
and paid Php 1,200 for delivery charges to the job site. The equipment
has a normal life of 10 years with a trade-in value of Php 5,000 against
the purchase of new equipment at the end of life. Determine the
annual depreciation cost and book value after 5 years using sinking
fund method assume interest at 6% compounded annually.
2.) A certain office equipment has a first cost of P 20,000 and has a
salvage value of P 1000 at the end of 10 years. Determine the total
depreciation at the end of 6th year using sinking fund method at 3%
interest.
• SUM OF THE YEARS-DIGIT METHOD
- respective depreciation charges:
𝑛
First year: 𝑑1 = (𝐶𝑜 − 𝐶𝐿 ) σ 𝑦𝑒𝑎𝑟𝑠
𝑛−1
Second year: 𝑑2 = (𝐶𝑜 − 𝐶𝐿 ) σ 𝑦𝑒𝑎𝑟𝑠
𝑛−2
Third year: 𝑑3 = (𝐶𝑜 − 𝐶𝐿 ) σ 𝑦𝑒𝑎𝑟𝑠
𝑛 𝑛+1
σ 𝑦𝑒𝑎𝑟𝑠 =
2
𝐶𝑛 = 𝐶𝑜 − 𝐷𝑛 ; 𝐷𝑛 = (𝑑1 + 𝑑2 + … + 𝑑𝑛 )
• Other formula
𝑟𝑒𝑣𝑒𝑟𝑠𝑒 𝑑𝑖𝑔𝑖𝑡
𝑑𝑛 = (𝐶𝑜 − 𝐶𝐿 )
𝑠𝑢𝑚 𝑜𝑓 𝑑𝑖𝑔𝑖𝑡𝑠
σ 𝑟𝑒𝑣𝑒𝑟𝑠𝑒 𝑑𝑖𝑔𝑖𝑡𝑠
𝐷𝑛 = (𝐶𝑜 − 𝐶𝐿 )
σ 𝑠𝑢𝑚 𝑜𝑓 𝑑𝑖𝑔𝑖𝑡𝑠
• Sample Problem
1.) A structure costs P 14,000 new. It is estimated to have a life of 5
years with a salvage value at the end of life of P 1,500. Determine the
book value at the end of each year of life
2.) A company purchases an asset for P 10,000.00 and plans to keep it
for 20 years. If the salvage value is zero at the end of 20th year, what is
the depreciation in the third year? Use SYD method.
