- 2065 Chaitra · 4 marks
Short note: depreciation
Short answer
Depreciation is the systematic allocation of an asset’s cost over its useful life, reflecting wear, tear, and obsolescence. It is a non-cash tax-deductible expense that generates a tax shield. Common methods: straight-line, declining balance, sum-of-years'-digits, sinking fund, and MACRS.
Write a short note on depreciation.
Depreciation is the loss in the value of a physical asset because of wear and tear, ageing, obsolescence or the passage of time. In accounting it is the systematic allocation of the cost of an asset, less its salvage value, over its useful life.
Why it matters in engineering economy
- It is a non-cash charge: it is not a payment, but it is deducted from revenue to find taxable income. The tax saved = depreciation × tax rate (the tax shield).
- It shows the book value of the asset at any time: BV = P − accumulated depreciation.
- It is used to plan recovery of capital for replacement.
Causes
Physical deterioration, functional obsolescence, inadequacy, changes in requirements or law, depletion and fall in market price.
Main methods
| Method | Formula |
|---|---|
| Straight line | D = (P − S)/N |
| Declining balance / DDB | D_k = R × BV_(k−1); R = 2/N for DDB |
| Sum of years' digits | D_k = (P − S)(N − k + 1)/[N(N + 1)/2] |
| Sinking fund | D_k = (P − S)(A/F,i,N)(F/P,i,k − 1) |
| MACRS | cost × table percentage |
Example: P = Rs 1,00,000, S = Rs 10,000, N = 5. SL depreciation = 18,000 per year, so BV₂ = 64,000.
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