Depreciation
Learning Objectives
•Calculate depreciation rates using the prime
cost method
•Calculate depreciation rates using the
diminishing value method
•Calculate depreciation rates using the unitsof-production method
Depreciation
Definition:
•The value of assets gradually reduces over time as
they approach the end of their useful lives, assets that
lose value in this way are said to depreciate, and the
amount of this lost value is called DEPRECATION
Introduction
 Depreciable assets
 The value of an asset gradually reduces over time
as it approaches the end of its useful life. Assets that
lose value in this way are said to depreciate
 The amount of this lost value is called depreciation
and represents a depreciation expense
 The assets themselves are known as depreciable
assets, and each one has limited effective life
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Depreciation
Three types of depreciation methods
•
•
•
prime cost
diminishing value
units-of-production
Depreciation
Depreciated value:
•
Once an asset has been depreciated, it is then
said to have a certain book value, which is its
original value minus all the depreciation
deductions to date
•
Book Value = original cost of asset – depreciation
to date
Prime Cost Method
•
The Prime cost method assumes that the value of
an asset depreciated by a fixed sum each year over
the life of the asset. It is also called straight line
depreciation because the cumulative depreciation
plotted against time yields a straight line
Annual depreciation = Original cost price/ effective
life in years
Example
 A business purchases new carpet for 5500
pounds with an effective life estimated to
be 5 years, use the prime cost to find
 The amount of annual depreciation
 The book value after 3 years
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Diminishing Value Method
•
The diminishing value method assumes that the
depreciation of an asset is highest in the earliest years of
its life and calculated it as a fixed percentage of the
preceding book value. This is done because many assets
are more productive when new and become less efficient
as the get older
•
Book value at the end of year K
= original cost (1- depreciation rate)k
•
Accumulated depreciation at the end of year K
= original cost – book value at the end of year K
Example
•
A company purchases a car for 12500. The
diminishing value rate is 22.5% each year.
Please find out the book value at the end of 5
years.
Example
A company buy a new asset for 12000, which is
decided to depreciate it using the diminishing
value method, and the book value at the end of 3
years was 5062.5. Find out the rate of depreciation
each year
Units-of-Production Method
•
The unit of production method deals with items that deteriorate
more with use rather than age, their useful life is determined by
their total output rather than their age
•
Rate of depreciation or depreciation cost per unit
= original cost price / effective life in terms of output
Example
•
An office laser printer costing 2750 pounds has an
effective life of 10,000 pages, please find out:
1. using the units of production method calculate the
depreciation rate per page of output
2. the book value after the printer has printed 3600 pages.
Summary
 We calculated depreciation using the
prime cost (straight line) method
 We also calculated depreciation using the
diminishing value (reducing balance)
method
 And we calculated depreciation rates using
the units-of-production method
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