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- 2071 Bhadra · 6+6 marks
Depreciation, causes, methods; DB schedule for 60,000
Short answer
Depreciation is systematic allocation of asset cost due to wear, obsolescence, etc. Three common methods: straight-line, declining balance, sum-of-years’-digits. For Rs 60,000 at 20% DB over 10 years, annual depreciation: Rs 12,000, 9,600, 7,680, 6,144, 4,915, 3,932, 3,146, 2,517, 2,013, 1,611; ending book value Rs 6,442.
What do you mean by depreciation? Explain about the causes of it. Explain about any three methods of depreciation calculation that are used commonly. A machine purchased for Rs. 60,000 by expecting useful life of 10 years. Calculate the depreciation amount for each year by using declining balance method when rate of depreciation is 20% per year.
Depreciation
Depreciation is the decrease in the value of a physical asset with the passage of time and use. In accounting and tax it is the systematic allocation of the cost of an asset (less its salvage value) over its useful life. It is a non-cash expense, but it is deductible from taxable income.
Causes of depreciation
- Physical deterioration (wear and tear): use, friction, corrosion, weather and ageing reduce the strength and efficiency of the asset.
- Functional obsolescence: new technology or new designs make the old asset out of date, even though it is physically sound.
- Inadequacy: the asset can no longer meet the growth in demand or capacity.
- Changes in requirement or law: a change in the product, safety rules or environmental standards makes the asset unsuitable.
- Depletion: the asset is a natural resource (mine, quarry) that is used up as material is extracted.
- Fall in market price: a decline in the market value of the asset because of changes in the economy or demand.
- Time (lapse of legal right): a fixed term of use, such as a lease, patent, license or concession, ends.
- Accident or damage: fire, flood, earthquake or accidents shorten the life.
Common methods of depreciation
- Straight-line (SL): equal charge each year, D = (P − S)/N. Book value falls linearly.
- Declining balance (DB): a fixed percentage of the opening book value, D_k = R × BV_(k−1); large charges in early years. DDB uses R = 2/N.
- Sum-of-the-years'-digits (SOYD): D_k = (P − S)(N − k + 1)/[N(N + 1)/2]; accelerated, falling by equal steps.
- Sinking fund: deposit (P − S)(A/F,i,N) each year, with D_k = deposit × (F/P,i,k − 1); small early charges, larger later.
- Unit of production: D = (P − S) × (output in the year / total expected output).
- MACRS: percentage tables by property class, used for tax.
Declining-balance schedule for Rs 60,000 (R = 20%, N = 10)
D_k = 0.20 × BV_(k−1); BV_k = BV_(k−1) − D_k.
| Year | Opening BV | Depreciation | Closing BV |
|---|---|---|---|
| 1 | 60,000 | 12,000 | 48,000 |
| 2 | 48,000 | 9,600 | 38,400 |
| 3 | 38,400 | 7,680 | 30,720 |
| 4 | 30,720 | 6,144 | 24,576 |
| 5 | 24,576 | 4,915 | 19,661 |
| 6 | 19,661 | 3,932 | 15,729 |
| 7 | 15,729 | 3,146 | 12,583 |
| 8 | 12,583 | 2,517 | 10,066 |
| 9 | 10,066 | 2,013 | 8,053 |
| 10 | 8,053 | 1,611 | 6,442 |
Total depreciation over 10 years = 60,000 − 6,442 = Rs 53,558; the book value at the end of year 10 is Rs 6,442.
✓ Answer checked by Claude Opus 5.5 (high effort)
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