Mada za sehemu hiiProvisions For DepreciationMada 3
- Depreciation
- METHODS OF CALCULATING DEPRECIATION CHARGES:
- DISPOSAL OF A NON-CURRENT ASSET
In this method, the number of years of use is estimated. The cost is then divided by the number of years.
Example
If a van was bought for 22,000 and we thought we could keep it for four years and then sell it for 2,000. What depreciation to be charged each year would be?
Depreciation = (Cost – Disposal value) / Estimated number of years
Depreciation = (22,000 – 2,000) / 4 = 20,000 / 4 = 5,000/=
Therefore, Depreciation to be per year is 5,000/=
In this method, a fixed percentage for depreciation is deducted from the cost in the first year. In the second and the third years the same percentage is taken of the reduced balance. This method is also known as "Diminishing balance method".
A machine is bought for 10,000/= and depreciation is to be charged at 20%. The calculations of the first three years would be as follows:
| Year | Calculation | Depreciation | Remaining Value |
|---|---|---|---|
| Cost | 10,000 | ||
| 1st year | 20% of 10,000 | 2,000 | 8,000 |
| 2nd year | 20% of 8,000 | 1,600 | 6,400 |
| 3rd year | 20% of 6,400 | 1,280 | 5,120 |
This method establishes the total expected units of output expected from the assets. Depreciation, based on cost less salvage value, is then calculated for the period by taking that period's units of output as a proportion of the total expected output over the life of the asset.
A machine which is expected to be able to produce 10,000 widgets over its useful life. It has cost 6,000/= and has an expected salvage value of 1,000/=. In year 1 a total of 1,500 widgets are produced and in year 2 the production is 2,500 widgets.
Depreciation = (Cost – Salvage value) × (Period's production / Total expected production)
Year 1: (6,000 – 1,000) × (1,500 / 10,000) = 5,000 × 0.15 = 750/=
Year 2: (6,000 – 1,000) × (2,500 / 10,000) = 5,000 × 0.25 = 1,250/=
Year 1 Depreciation = 750/=
Year 2 Depreciation = 1,250/=
Given an asset costing 3,000/= which will be in use for five years, the calculation will be:
Sum of years digits = n/2 (n + 1) = 5/2 (5 + 1) = 5/2 × 6 = 15
| Year | Fraction | Calculation | Depreciation |
|---|---|---|---|
| 1st year | 5/15 | 5/15 × 3,000 | 1,000 |
| 2nd year | 4/15 | 4/15 × 3,000 | 800 |
| 3rd year | 3/15 | 3/15 × 3,000 | 600 |
| 4th year | 2/15 | 2/15 × 3,000 | 400 |
| 5th year | 1/15 | 1/15 × 3,000 | 200 |
| Total | 3,000 |
A quarry was bought for 5,000/= and it was expected to contain 1,000 tonnes of salable materials, then for each ton taken out we would depreciate it by 5/= (Since 5,000 ÷ 1,000 = 5). This can be shown as:
Depreciation = (Cost of asset / Expected total contents in units) × Number of units taken
With a machine the depreciation provision may be based on the number of hours that the machine was operated during the period compared with the total expected running hours during the machine's life with the business.
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