LESSON 14:

DEPRECIATION
 REPORTERS

MARK L. DE GUZMAN 01
ANGEL ELLAINE
02 CUNTAPAY

MARIFE J. DAWAYAN 03
ASHLIE SHANE
04 RARAMA

ROWENA M. TULAYAO 05
 Define Basic terms

Discuss the nature of depreciation

LEARNING Discuss the factors considered to

OBJECTIVES
determine depreciation expenses

: Give the four methods of

computing depreciation expense

Prepare a depreciation schedule

 Almost 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become outdated as technology changes. Think about the
computer you are using. You probably expect it to last only
about five years because every time you access it, the
components inside it get used up a little bit, and improved

Overview of the technology will eventually make it obsolete. This 'using up'
is called depreciation, and that five years is considered the
computer's useful life.

topic: Small businesses write off expenses when they occur. But
larger items, such as vehicles, cannot be "expensed." These
larger items are called assets, and their cost is written off
over a number of years using an accounting method called
depreciation.
Nature of Depreciation
To establish and engage in business, incorporators, all of legal age as required by the law may form a stock
corporation. Authorized capital stocks may be shared by the stock holders which will be used to purchase,
lease or hold real and personal properties as may be needed or required by the established business. These
properties may be apparatus, equipment, machines, and appliances as may be necessary for the useful
prosecution of the business. Since the stockholders have invested their money, the profits earned from the
operation of the business have to be distributed periodically among them. The net profits derive from the
business can only be determined after paying all operating expenses like salaries and allowances of
employees, taxes and licenses, insurance, rentals, light and water, office supplies and other expenses like
interest on loans and the like.

So when a business firm acquires new apparatus, equipment machines and appliances, it should be able to
determine what the probable life span of the physical asset purchased will have and the probable scrap or
trade – in value it has at the end of the useful life of the asset, until these machines or other similar assets are
eventually sold, replaced or retired. Whatever depreciation schedule is to be decided upon periodically, it
should be remembered that the total depreciation added to the book value of the asset must be equal to the
original cost of the asset.
 DEPRECIATION is defined as the reduction of recorded cost
of a fixed asset in a systematic manner until the value of the
asset becomes zero or negligible.

DEPRECIATION is referred to as a loss or decrease in value

of physical assets or properties due to factors like wear and
tear, inadequate performance, decay and repairs. It also
refers to the systematic allocation of the assets’ cost over the
assets; estimated useful life. The concept of depreciation is
applicable only to non current assets.

An example of fixed assets are buildings, furniture, office

equipment, machinery etc. A land is the only exception
which cannot be depreciated as the value of land
appreciates with time.
Things to remember:
Properties or assets whose useful life extends beyond one
year are known as FIXED ASSSETS or NON–
CURRENT ASSETS. These assets are not treated as
outright expenses, but rather capitalized. In other words,
upon the acquisition of these assets, one may not say that
he/she has incurred expenses. The costs of these assets
are usually significant or large and allocated over the
assets’ estimated useful life. Examples are land, buildings,
machinery, equipment, furniture and fixtures.

However, the value and usefulness of non–current assets –

except for land – decrease as these assets are used every
day. And one of the integral parts of the accounting
system is what we call depreciation.
Things to remember:
The increase in the value of an asset is called
APPRECIATION. There is appreciation when the
prevailing market value of an asset is higher than its
acquisition cost or carrying value. Basically, the
value of the land does not depreciate but appreciate.
Elements of
depreciation
 Causes of Depreciation

1 Technological Changes

2 Wear and tear due to frequent utilization

3
Obsolescence
4 Passage of time

5
Inadequacy in meeting production requirements
6 Accidents brought by natural calamities
Residual Value

Residual Value (Scrap Value or Salvage

Value) refers to the estimated amount
that may be derived from the disposal
of an asset at the end of its useful life.

it is basically based on estimates, and it

may change during the productive life
of the asset.
Estimated Useful Life

refers to the productive life of the asset

or the period when the asset is still
usable

is the time period over which the

company expects that the asset will be
productive
Cost of the Asset

This includes taxes, shipping, and

preparation/setup expenses

Refers to the price or the cash equivalent paid

to acquire an asset which includes the purchase
piece and other incidental expenses related to
acquisition like import duties, purchase taxes,
freight and handling, testing costs and
estimated cost of dismantling and restoration
Methods of
Proving
Depreciation
 STRAIGHT LINE METHOD

 Is regarded as the simplest way to determine the amount of depreciation which assumes

expense is the same for every year the asset in use.

 Allocates equally the asset’s depreciable cost over its estimated useful life

 This method assumes that passage of time is primary cause of the reduction in the value of the

asset.

 This method derives its name from a straight line graph. This graph is deduced after plotting

an equal amount of depreciation for each accounting period over the useful life of the asset.

 Straight line method is basically applicable to buildings, office equipment, furniture and

fixtures.

 Calculation is done periodically under the assumption that the amount of depreciations

constant annually.
 FORMULAS:

𝑪 − 𝑺𝑽
𝑫 𝑨= 𝑫 𝑨 =𝑫 𝑪 ÷ 𝑫 𝑹
𝒕
Where:

Note:
ANNUAL DEPRECIATION is the loss in value which takes place in a year.
DEPRECIATION RATE using the straight line method is computed by dividing 100% by the estimated
useful life of the asset.
 EXAMPLE:

1. On January 1, 2012, a commercial building is acquired at a total cost of P3, 500, 000. It is estimated to be
useful for 10 years with a scrap value of P300, 000. Compute for the annual depreciation.
or
Given:
C = P3, 500, 000
SV = P300, 000
DC = 3, 500, 000 – 300, 000 = 3, 200, 000
DR = 100% = 10%
t = 10 years

3,500,000 − 300,000
𝐷𝐴= =320,000
𝑜𝑟 𝐷 𝐴 =3,200,000 ( 0.10 )=320,000
10
 EXAMPLE:

2. A machine costs P6, 000 and will have a salvage value of P500 when retired at the end of 4
years. Prepare a depreciation schedule for the machine using the straight line method.

Given:
C = P6, 000
SV = P500
t = 10 years
 Year Annual Accrued Depreciation Book Value
Depreciation Charges (Accumulated BV = BV* – DA
Depreciation)
ADC = ADC* + DA

0 0 0 6, 000

1 1, 375 0 + 1, 375 = 1, 375 6000 – 1, 375 = 4, 625

2 1, 375 1, 375 + 1, 375 = 2, 750 4, 625 – 1, 375 = 3, 250

3 1, 375 2, 750 + 1, 375 = 4, 125 3, 250 – 1, 375 = 1, 875

4 1, 375 4, 125 + 1, 375 = 5, 500 1, 875 – 1, 375 = 550

ADC* is the previous Accrued Depreciation Charges

BV* is the previous Book Value
 UNIT-OF-PRODUCTION METHOD

 It determines the annual depreciation of an asset in terms of its output or production. Allocates

equally the asset’s depreciable cost over its estimated useful life

 It assumes that the asset depreciates faster if more units are produced during the period.

 The Unit of Production Method is basically used to compute depreciation for machinery

transport vehicles, equipment, ships and mining construction equipment.

 The units of production method is two-step process used to calculate depreciation for assets

whose useful life is measured in output capability rather than years.

 Units of production depreciation is a depreciation method that allows businesses to determine

the value of an asset based upon usage. Common in manufacturing, it’s calculated by dividing

the equipment’s net cost by its expected lifetime production. Multiplying this rate by asset’s

output for the year gives you the depreciation expense.

 FORMULAS:
𝑪 − 𝑺𝑽
𝐃𝐑𝐔=
𝑬𝑼𝑷
Where:

Note:
The Estimated Unit of Production may be expressed in terms of working hours, service hours or
units to be produced.
 Steps in Using Unit of Production
Method

1. Compute the depreciation rate per unit by

dividing the depreciable cost by the
estimated units to produce.
2. Determine the annual depreciation by
multiplying the depreciation rate per unit by
the actual units produced or utilized.
 EXAMPLE:

1. A machinery has a total cost of P3, 150, 000. It has an

estimated scrap value of P150, 000 after producing 750, 000
units of product A. the actual productions in 5 years are as
follows:
Year 1 170, 000 units
Year 2 160, 000 units
Year 3 150, 000 units
Year 4 145, 000 units
Year 5 125, 000 units
Total 750, 000 units
Find the annual depreciation and prepare a depreciation table.

Given:
C = 3, 150, 000
SV = 150, 000
EUP = 750, 000
SOLUTIONS:

This means that the annual depreciation for a particular period shall be equal to the
product of the depreciation rate of P4 times the actual units produced.
Computing for the Annual Depreciation (DA)
Year 1 170, 000 (4) = P680, 000 Year 4 145, 000 (4) = 580, 000
Year 2 160, 000 (4) = 640, 000 Year 5 125, 000 (4) = 500, 000
Year 3 150, 000 (4) = 600, 000
 Accrued Depreciation Book Value
Charges
Year Annual (Accumulated Depreciation) BV = BV* – DA
Depreciation ADC = ADC* + DA

Acquisition 3, 150, 000

Cost

1 680, 000 680, 000 2, 470, 000

2 640, 000 1, 320, 000 1, 830, 000

3 600, 000 1, 920, 000 1, 230, 000

4 580, 000 2, 500, 000 650, 000

5 500, 000 3, 000, 000 150, 000

Total 3, 000, 000

 SUM-of-the-YEARS DIGIT
METHOD

 It computes annual depreciation by multiplying the depreciable cost of the asset by a fraction whose

numerator is equal to the unexpired life of the asset in that period and whose denominator is the sum of the

life of the asset

 The SYD Method assumes that the asset loses its usefulness faster in early periods and slower - during the

later years. Thus, the annual depreciation provided in early years is higher compared to the later years.

 The SYD methods assumes higher incurred expenses in the early years with lower incurred expenses in the

latter years. Another accelerated depreciation method is the Sum of Years’ depreciable amount of an asset is

charged to a fraction over different accounting periods under this method.

 Steps in Using Sum of the Year Digit
Method

1. Compute the sum of the digit in years using the

formula:

2. Compute the annual depreciation by multiplying

the depreciable cost by the fraction.
 EXAMPLE:

1. An equipment was purchased at a total cost of P4, 300, 000. The useful life of the machine was estimated to
be 4 years. The residual value after 4 years is estimated to be P300, 000. Determine the annual
depreciation and construct a depreciation table.
Given:
C = 4, 300, 000 RV = 300, 000 t = 4 years DC = 4, 000, 000

Fractions:
 EXAMPLE:

     
ANNUAL DEPRECIATION (DA)
Year DC Fraction DA
1 4, 000, 000 4/10 P1, 600, 000

2 4, 000, 000 3/10 1, 200, 000

3 4, 000, 000 2/10 800, 000

4 4, 000, 000 1/10 400, 000

Total P4, 000, 000

 EXAMPLE:

Year Annual Accrued Depreciation Book Value BV

Depreciatio Charges(Accumulated = BV* – DA
n Depreciation)
ADC = ADC* + DA

Acquisition P4, 300, 000

Cost
1 1, 600, 000 1, 600, 000 2, 700, 000
2 1, 200, 000 2, 800, 000 1, 500, 000
3 800, 000 3, 600, 000 700, 000
4 400, 000 4, 000, 000 300, 000
Total 4, 000, 000
 DOUBLE-DECLINING BALANCE
METHOD
 This method of computing depreciation simply doubles the depreciation rate used in straight line method.

However, in computing for the annual depreciation, the depreciation rate is multiplied with the declining

balance or book value.

 The scrap value of an asset is disregarded in the computation of the annual depreciation in the first year. This

means that the depreciation rate shall be multiplied by the acquisition cost. However, in the last year, the

annual depreciation to be provided shall be equal to the remaining book value and salvage value.

 The double declining balance depreciation method is an accelerated depreciation method that counts as an

expense more rapidly when compared to straight-line depreciation that uses the same amount of depreciation

each year over an asset’s useful life.

 Double declining balance depreciation is often used with larger purchases, in which the value of the product is

seen to be higher in the early years

 Steps in Using Double-declining Balance
Method
1. Obtain the beginning book value of the asset (e.g., P1,200,000)
2. Determine the useful life of the asset (e.g., 5 years)
3. Determine the salvage value of the asset (e.g., P200, 000)
4. Deduct the salvage value from the beginning book value to determine the total
depreciable amount for the life of the asset. (i.e., P1, 200, 000- P100, 000 = P 1, 100,
000)
5. Calculate the annual depreciation rate (i.e., 100% / 5 years = 20%)
6. Multiply the beginning period book value by twice the regular annual rate (P 1, 200,
000 x 40% = P 480, 000)
7. Deduct the annual depreciation expense from the beginning period value to calculate
the ending period value.
8. Repeat the above steps until the salvage value is reached.
 EXAMPLE:

1. A machinery costing P2, 500, 000 is estimated to have a useful

life of 5 years and a salvage value of P200, 000. Find the
annual depreciation and prepare a depreciation table.
DR = 100% ÷ 5 = 20% (2) = 40%

Year BV DR DA
1 P2, 500, 000 40% P1, 000, 000
2 1, 500, 000 40% 600, 000
3 900, 000 40% 360, 000
4 540, 000 40% 216, 000
5 324, 000 - 200, 000 124, 000
Total P2, 300, 000
 Year Annual Accrued Depreciation Book Value
Depreciation Charges(Accumulated BV = BV* – DA
Depreciation)
ADC = ADC* + DA

Acquisition Cost P2, 500, 000

1 1, 000, 000 1, 000, 000 1, 500, 000
2 600, 000 1, 600, 000 900, 000
3 360, 000 1, 960, 000 540, 000
4 216, 000 2, 176, 000 324, 000
5 124, 000 2, 300, 000 200, 000
Total 2, 300, 000
Assignment:
1. A machinery costing P3,
500, 000 is estimated to
have a useful life of 6 years
and a salvage value of P500,
000.
Find the annual depreciation
and prepare a depreciation
table.
THANKS FOR
LISTENING!