DEPRECIATION

• DEPRECIATION – decrease in the value of

physical property with the passage of time
TERMS:
• FIRST COST, FC – purchase price, cost of
property or machinery
• USEFUL LIFE, n – expected (estimated) period
that a property will be used in a trade or
business to produce income
• SALVAGE VALUE, SVn – estimated value of
property at end of its useful life; expected
selling price of a property when asset can no
longer be used productively by its owner
• Dn – total depreciation for n (useful) years
• Dr – total depreciation for r years
• Book Value, BVr – worth of depreciable
property; original price minus depreciation
deductions
 STRAIGHT LINE METHOD
• Assumes loss in value of property is directly
proportional to its age
• Constant amount is depreciated each year
over useful life of property
• No interest is assumed to be made
 1 2 3 4 5=n

Dr (D4)
Dn
FC
FC = Dn + SVn
dr FC = Dr + BVr
BVr (BV4)
SVn
dr=d=d1=d2=d3=... = dn

Dn = ndr

Dr = rd
 EXAMPLE
ABC Construction bought an equipment
for P60,000 with a salvage value of P10,000.
The equipment is expected to have a life of 10
years. Using straight line method:
a) Depreciation charge during 6th year
b) Accumulated depreciation for period of 6
years
c) Book Value at end of 6th year
 EXAMPLE
ABC Construction bought an equipment
for P60,000 with a salvage value of P10,000.
The equipment is expected to have a life of 10
years. Using straight line method:
a) P5,000
b) P30,000
c) P30,000
 SINKING FUND METHOD
• Assumes that a sinking fund is established in
which funds will accumulate for a replacement
• Total depreciation that has taken place up to
any given time is assumed to be equal to
accumulated amount in sinking fund at that
time
 1 2 3 4 5=n
FC = Dn + SVn
Dr (D4) FC = Dr + BVr
Dn
FC
dr
BVr (BV4)
SVn
 EXAMPLE
ABC Construction bought an equipment
for P60,000 with a salvage value of P10,000.
The equipment is expected to have a life of 10
years. Using sinking fund method: (i = 10%)
a) Depreciation charge during 6th year
b) Accumulated depreciation for period of 6
years
c) Book Value at end of 6th year
 EXAMPLE
ABC Construction bought an equipment
for P60,000 with a salvage value of P10,000.
The equipment is expected to have a life of 10
years. Using sinking fund method: (i = 10%)
a) P3,137.27
b) P24,205.95
c) P35794.05
SUM OF THE YEARS DIGIT METHOD
n Depreciation FC = Dn + SVn
per year FC = Dr + BVr
1 5 d1 = (5/15)Dn
2 4 d2= (4/15)Dn Dr = d1 + d2 +...+dn
3 3 d3 = (3/15)Dn
4 2 d4 = (2/15)Dn
dr = BVr-1 - BVr
5 1 d5 = (1/15)Dn
∑ 15
 EXAMPLE
ABC Construction bought an equipment
for P60,000 with a salvage value of P10,000.
The equipment is expected to have a life of 10
years. Using sum of the years method:
a) Depreciation charge during 6th year
b) Accumulated depreciation for period of 6
years
c) Book Value at end of 6th year
 EXAMPLE
ABC Construction bought an equipment
for P60,000 with a salvage value of P10,000.
The equipment is expected to have a life of 10
years. Using sum of the years method:
a) P4,545.45
b) P40,909.09
c) P19090.91
 DECLINING BALANCE
• Also called as constant percentage method or
Matheson formula
• Assumed that annual cost of depreciation is
fixed percentage of salvage value at beginning
of year
• Ratio of depreciation in any year to book value
at beginning of that year is constant k (rate of
depreciation)
FC = Dr + BVr

dr = BVr-1 - BVr
 EXAMPLE
ABC Construction bought an equipment
for P60,000 with a salvage value of P10,000.
The equipment is expected to have a life of 10
years. Using declining balance method:
a) Depreciation charge during 6th year
b) Accumulated depreciation for period of 6
years
c) Book Value at end of 6th year
 EXAMPLE
ABC Construction bought an equipment
for P60,000 with a salvage value of P10,000.
The equipment is expected to have a life of 10
years. Using declining balance method:
a) P4,018.17
b) P39,523.27
c) P20,746.73
 DOUBLE DECLINING BALANCE
• Very similar to declining balance method
except that rate of depreciation k is replaced
by 2/L

FC = Dr + BVr

dr = BVr-1 - BVr
 EXAMPLE
ABC Construction bought an equipment
for P60,000 with a salvage value of P10,000.
The equipment is expected to have a life of 10
years. Using double declining balance method:
a) Depreciation charge during 6th year
b) Accumulated depreciation for period of 6
years
c) Book Value at end of 6th year
 EXAMPLE
ABC Construction bought an equipment
for P60,000 with a salvage value of P10,000.
The equipment is expected to have a life of 10
years. Using double declining balance method:
a) P3,932.16
b) P44,271.36
c) P15,728.64