DEPRECIATION, AMORTIZATION, WRITE – OFF, DEPRECIATION

FUNDBy,

Saran raj S LChenthylathiban S K

Jeeviga JPreethy S

Manisha Susan

DEFINITION Depreciation is a non – cash expense that reduces the value of an

asset over a period of time

Reason for asset depreciation ◦ Wear and tear of machinery◦ Obsolescence – value gets depreciated due to replacement of newer models

Methods for calculating depreciation◦ Straight line method◦ Sum of years depreciation◦ Declining balance calculation

DEPRECIATION

Straight line methodStraight line method depreciates cost evenly through out the

useful life of the fixed asset.

Formula

Salvage value – The estimated value that an asset will realize upon its sale at the end of its useful life. Company

DEPRECIATION - CALCULATION

Depreciation per annum = (Cost – Salvage value) Useful life

Example

Depreciation = 10500 – 500 5

= Rs. 2000

Cost of the asset 10500

Less: salvage value 500

Depreciable cost 10000

Years of estimated useful time (in yrs) 5

Sum of year’s method◦ Accelerated depreciation technique◦ based on the assumption that assets are more productive when they are

new and productivity decreases with time Formula

Example Cost of the asset – Rs. 45000

Salvage value – Rs. 5000 Useful life – 4 years

Depreciation = depreciation base * remaining useful life sum of year’s digits

Calculation

Depreciation factor = n(n+1) 2

= 4*5 = 10 2

Year Depreciation base (Rs)

Depreciation factor

Depreciation expense

Accumulated depreciation

1 40000 4/10 16000 16000

2 40000 3/10 12000 28000

3 40000 2/10 8000 36000

4 40000 1/10 4000 40000

Reducing balance method◦ Reducing Balance Method charges depreciation at a higher rate in the

earlier years of an asset. ◦ The amount of depreciation reduces as the life of the asset progresses. ◦ Depreciation under reducing balance method may be calculated as

follows:◦ Depreciation per annum = (Net Book Value - Residual Value) x Rate%

Example

o An asset has a useful life of 3 years. o Cost of the asset is $2,000. o Residual Value is $500. o Rate of depreciation is 50%.o Depreciation expense for the three years will be as follows:

Definition Amortization is known as the paying off of debt in regular instalments

over a period of time. Amortization is also known as the deduction of capital expenses over a

specific period of time (usually over the asset's life). Measures the consumption of the value of intangible assets, such as a

patent or a copyright. Example

borrowing amount – Rs. 100000

payment – monthly payment for 30 years

AMORTIZATION

Write off is a reduction in the value of an asset or earnings by the amount of an expense or loss.

For example:- when an account receivable cannot be collected, - or when inventory is obsolete, - when there is no longer any use for a fixed asset, - or when an employee leaves the company and is not willing to pay the company back for a pay advance.

The general concept is to credit the asset account and debit an expense account.

WRITE OFF

Also called as sinking fund or amortization fund

Definition ◦ A fund set up by a company to provide money to buy new  fixed assets.◦ Every year the company invest certain amount that is equal to existing

asset’s depreciation value◦ This facilitates the company to use the money to buy new assets

Formula

C – cost of asset

R – residual value

i – interest rate

n – no of years

DEPRECIATION FUND

Annual depreciation charges = ((C-R)/((1+i)n-1)/i)

Example An asset has Rs.21,000 of original cost, Rs.1,000 of residual value, and 5

year of useful life. The annual interest for money earned is 5%.

Depreciation charge = ( 21,000 - 1,000)/((1+5%)5 - 1)/5%)

                                                = 20,000/5,52563

                                             = Rs. 3,619.50 Depreciation schedule

http://www.investopedia.com/articles/fundamental/04/090804.asp http://accounting-simplified.com/financial/fixed-assets/depreciation-

methods/straight-line.html http://www.accountingcoach.com/online-accounting-course/11Xpg01.html http://accounting-simplified.com/financial/fixed-assets/depreciation-

methods/declining-balance.html http://www.investopedia.com/terms/a/amortization.asp http://banking.about.com/od/loans/a/amortization_calculations.htm http://www.investopedia.com/terms/w/write-off.asp http://www.accountingtools.com/dictionary-write-off http://www.investopedia.com/terms/s/sinking-fund-method.asp http://www.accountingexplanation.com/

sinking_fund_method_of_depreciation.htm http://www.varieart.com/article272-Calculating-Depreciation-Using-the-

Sinking-Fund-or-Interest-Computing-Method

REFERENCES