The decrease in value of the capital assets like buildings,vehicles,furniture,equipment of a business entity due to wear and tear or passage of time is said to be Depreciation.
ADVANTAGES OF DEPRECIATION
1 To find actual cost of product.
2 To find actual profit and loss.
3 To change old asset with new one
4 To find the taxable income
5 To create financial report
METHODS OF CALCULATING DEPRECIATION
1. Straight Line Method
In this method the amount of depreciation remains constant throughout the life span of asset.
Annual Depreciation = ( Total Depreciation / Life Span of Asset )
= (( Initial Investment - Salvage Value ) / Life Span of Asset )
Rate (%) = (Annual Depreciation / Total Depreciation) *100
2. Declining Balance Method
In this method the rate of depreciation remains constant throughout the life span of asset.
Depreciation at the end of year = Rate % * Book Value
Book Value = Initial Investment-Accumulated depreciation
Rate = 1- (S/I)^(1/N)
3. Sinking Fund Method
In this method the amount of depreciation remains constant at the end of each year which earns compound interest to accumulated value called total depreciated value
Depreciation at the end of year = Total Depreciation [A/F,i%,N]
= Total Depreciation * [i/(1+i)^n-1]
4. Sum of Year Digits (SOYD)
Depreciation at the end of year = (Remaining useful life/ SOYD)*Total Depreciation
Initial Investment = Money with which the project started
Salvage Value = Return profit after the life span of a project ends
Total Depreciation= Initial Investment-Salvage Value
N=Life of asset