How To Calculate Depreciation
Depreciation on Depreciable Assets is calculated by applying different Depreciation Methods. These Methods are used to compute depreciation according to Generally Accepted Accounting Principles (GAAP). Some important and famous depreciation methods are studied below one by one:
1. Straight Line Depreciation Method
Under this method, the depreciation is calculated by applying a fixed rate, let's say 10%, on the depreciable cost. In this method, the Depreciable Cost is equal to the cost of the assets
- residual value / Salvage Value (the amount of assets left after fully charging depreciation expense within the useful life). For Example, the rate of depreciation on furniture is 10% and the cost of the Furniture is Rs.
53000 then residual value is Rs 3000 that is left after charging Straight Line Depreciation Expense (50000/10 = 5000) for the useful life of Furniture (10 Years). Equal amount of Depreciation Expense is charged within the
10 years life of Furniture till the residual value is left Rs. 3000. Accounting Journal Entry for the annual depreciation expense is:
Depreciation Expense On Furniture a/c 5000
Accumulated Depreciation - Furniture a/c 5000
(Straight Line Depreciation is charged on Furniture by 10% for the Year)
2. Reducing Balance Method / Diminishing Balance Method
Under this method, the depreciation is calculated by multiplying depreciation rate with Cost of the Fixed Assets / Non Current Assets - Accumulated Depreciation that is a Book Value / Written
Down Value. The First’s year depreciation is the same as in case of Straight Line Method if there is no residual value but in the next year, the depreciation is different as depreciation rate is applied to the remaining balance of cost. The depreciation
is fully charged until it is possible to computer further or in other words, depreciation on Non Assets will continue until the useful life of Fixed Assets is completed.
For Example, if the cost of Office Equipment is Rs. 50000 and the rate of depreciation is 10%, then depreciation expense for the first year is the same as in case of Straight Line Method, as we will assume that there is no residual value at the end of useful life of equipment, but for the next year (2nd Year), depreciation is computed as shown below:
Depreciation - Equipment = Book Value / Rate of Depreciation = 45000 / 10 = 4500
Here Book Value or Written Down Value = 50000 - 5000 = 45000
Accounting Journal Entry For Depreciation for the 2nd year as follows:
Depreciation Expense - Equipment a/c 4500
Accumulated Depreciation a/c 4500
(Depreciation On Equipment is Charged at the Rate of 10% By Diminishing Balance Method)
The Depreciation Cost under this method is as follows:
Cost - Accumulated Depreciation
3. Double-Declining Balance Method
Under this method, the depreciation rate is doubled what the rate is over the useful life of Fixed assets / Non Current Assets and this rate is applied on depreciable cost that is the
Book Value of Assets. A Depreciation rate is the percentage of depreciation cost allocated to the depreciation expense each Accounting Period within the useful life of assets. Depreciation Rate is find out as shown below:
1 / Useful Life of Assets X 100
For Example, if the cost of Furniture is Rs. 63000, residual value is Rs. 3000, useful life is 10 years, then depreciation rate is:
1 / 10 X 100 = 10%
Now, according to this method, double this rate that is 20%. so, now furniture’s depreciable cost is (Cost - Accumulated Depreciation) charged to depreciation expense in the first year as:
Depreciation Expense - Furniture = 63000 X 20% = 12600
In the 2nd Year, the depreciation rate is applied on the book value (Cost - Accumulated Depreciation) that is a depreciable cost.
Depreciation Expense - Furniture = (63000 - 12600) X 20% = 50400 X 20% = 10080
In the 3rd Year
Depreciation Expense On Furniture = (63000 - 22680) X 20% = 8064
Similarly, the depreciation expense on furniture is calculated for remaining 7 years.
4. 150 Percent Decling-Balance Method
Under this depreciation method, the depreciation rate is multiplied by 150% and this rate is applied on depreciable cost that is Cost - Accumulated Depreciation. Depreciation rate is
calculated as shown below:
Depreciation Rate = 1 / Useful Life of Assets X 100
aritcle
This calculated rate is multiplyed with 150% to get depreciation rate under this method. For example, if the Furniture has Cost Rs. 84000, Residucal Value = Rs. 4000 and Useful Life
of Assets is 5, then depreciation expense for the first year as follows:
Depreciation Rate = 1 / 5 X 100 = 20%
Depreciation Rate Under This Method = 20% X 150% = 30%
Depreciation Expense On Furniture = Depreciation Cost X 30% = 84000 X 30% = Rs 25200
For 2nd Year:
Depreciation Expense - Furniture = (84000 - 25200) X 30% = Rs 17640
Similarly, depreciation expense for remaining 3 years is computed.
5. Sum of Year’s Digits Method
Under this method, the rate of depreciation is computed by dividing the reverse of numbers of total years number with the sum of digits of Useful life of a Fixed Assets / Non Current
Assets. Rate of Depreciation is applied on Depreciable Cost which is Cost - Residual Value. For Example, if the Useful life of Office Equipment is 10 years, cost is Rs. 73000, residual value is Rs. 3000, then, Mathematically,
we can expressed as shown below:
For the sum of digits of Useful Life, we can get:
1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 = 55
and for the reverse of numbers of years we simply change the order and divided this number by sum of digits of Useful Life of Office Equipment in order to calculate depreciation rate
for the first year as shown below:
Depreciation Rate for 1st year is 10 / 55 = .18182
Now Depreciation Amount for the first year is find out by applying this rate (.18182) on deprecation cost of office equipment as shown below:
73000 - 3000 X .18182 = 12727
Depreciation rate for 2nd year is 9/55 = .16364
Depreciation Amount for 2nd year is = 70000 X .16364 = 11455
Similarly, we can find depreciation rate and depreciation amount for remaining 8 years.
6. Unit of Output Method
This method is based on the usage of units of output produced by vehicles (Like Trucks, Airplane, etc.). The depreciation is calculated by multiplying depreciation rate with the Units
of Output produced by vehicles and some specific Machinery Assets during the Accounting Period. The depreciation rate is calculated in the same way as in case of Straight Line Method. But, here usage of production or output
is considered rather than passing of time. So, the more a Vehicle is producing, the more depreciation is charged on such vehicle. For Example, if the Motor Vehicle has cost Rs. 52000, residual value = 2000 and Unit of Output
is 150000 Miles, then depreciation rate is computed as shown below:
Depreciation Rate = Cost - Residual Value / Estimated Units of Output
= 52000 - 2000 / 150000 = .33 Per Mile
Now To Find out the amount of Depreciation Expense Per Year, let say the Motor Vehicle made a distance of 40000 Miles Per year, then we get:
40000 X .33 = 13200 miles
Similarly, we find out depreciation expense in the 2nd year. The entrepreneur will continue to charge the depreciation until the Motor Vehicle get the total estimated units of output, i.e., 150000 miles at the end.
So, these are the famous depreciation methods used by the companies to allocate cost of the Fixed Assets / Non Current Assets To Expense within the useful life In The Accounting Period
of the business.
Comments