12-04-2023

Depreciation-Introduction
• Depreciation is the gradual change in the value of an asset.

Construction Equipment •
•
For any machine, wear and tear is inevitable.
The wear and tear can not be completely avoided, only minimized.

Management
• The efficiency reduces with time and the machine finally becomes unusable
after a certain time.
• Development of new technologies also makes older equipment obsolete.
• Hence it is important to set aside some money from the annual profit so that
CMT 522 when the equipment becomes uneconomical, it can be replaced by a new one
Session 17 – Equipment Depreciation Analysis from the accumulated fund.
• The fund maintained for the purpose of replacing the equipment at the end of
its useful life is called ‘Depreciation Fund’ or ‘Sinking Fund’.
• Depreciation is also important for taxation purpose.

Aritra Halder
| Aritra Halder | Assistant Professor
Assistant Professor | School of Construction

Classification of Depreciation Depreciation - Causes

Wear & Tear

Physical Decay
Depreciation due to
physical condition
Accidental

Depreciation Deferred Maintenance and Neglect

Inadequacy
Depreciation due to
functional condition
Obsolescence

| Aritra Halder | Assistant Professor | Aritra Halder | Assistant Professor

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 12-04-2023

Calculating Depreciation – Straight Line Method Straight Line Method of Depreciation

• Asset having initial cost of Rs. 2 Lakh, Salvage value of 50000/- at the end of
• Straight Line Method : This is the most common method of calculating economic life of 5 years. Determine the annual depreciation and the book value
depreciation. It assumes that the equipment loses equal value every at the end of each year during the economic life of the equipment.
year during its useful life. • Rate of depreciation (R ) = 1/5 = 0.2
• The mathematical formula can be expressed as – • Total Depreciation (P –E) = (200000-50000) = 150000
–R = Rate of Depreciation = (ℎ𝑒𝑟𝑒, 𝑁 = 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑙𝑖𝑓𝑒) • Annual Depreciation (D ) = (P-E)XR = 150000*0.2 = 30,000

–D = Annual Depreciation = P − E × R Year (m) Opening Book Value (BVm-1) Annual Depreciation (Dm) Closing Book Value (BVm)
(ℎ𝑒𝑟𝑒, 𝑃 = 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡, 𝐸 = 𝑠𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒)
0 200000
– BV = Book Value at EOY (End of year m) = BV −D 1 200000 30000 170000
• Hence, to calculate depreciation in SL method, we need 3 numbers – 2 170000 30000 140000
the initial cost of asset, estimated useful life & salvage value at the end. 3 140000 30000 110000
4 110000 30000 80000
5 80000 30000 50000
| Aritra Halder | Assistant Professor | Aritra Halder | Assistant Professor

Straight Line Depreciation for any year Calculating Depreciation – Sum of the Years Method
• This method uses sum of the years of life as the basis of calculation.
• This leads to a higher rate of depreciation initially which reduces progressively.
• As tax rebate is applicable to depreciation of assets, this method of accounting will give
higher tax benefits in the early years of the economic life of the asset.

( )
• SOY = (1+2+3+……+n) =

• Annual rate of depreciation (R ) =

(ℎ𝑒𝑟𝑒, 𝑚 = 𝑟𝑒𝑠𝑝𝑒𝑐𝑡𝑖𝑣𝑒 𝑦𝑒𝑎𝑟 𝑜𝑓 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑖𝑜𝑛 & 𝑁 = 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑙𝑖𝑓𝑒)
• Total Depreciation (D) = (P – E)
• Annual Depreciation for the year m (D ) = (P – E)X R
• Book Value of the Asset for the year ( BV ) = BV -D

| Aritra Halder | Assistant Professor | Aritra Halder | Assistant Professor

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 12-04-2023

S-O-Y Instantaneous Formulae Sum of the Years Method

• Asset having initial cost of Rs. 2 Lakh, Salvage value of 50000/- at the end of
• The formulae for depreciation (Dt) and book value (Bt) for any specific economic life of 5 years. Determine the annual depreciation and the book value
given time frame (t) is as follows – at the end of each year during the economic life of the equipment.
– Depreciation
Opening Book Value Annual Rate of Annual Closing Book Value
Year (m)
(BVm-1) Depreciation (Rm) Depreciation (Dm) (BVm)
0 0 0 0 200000
– Book Value
1 200000 5/15 50000 150000
2 150000 4/15 40000 110000
3 110000 3/15 30000 80000
4 80000 2/15 20000 60000
5 60000 1/15 10000 50000

| Aritra Halder | Assistant Professor | Aritra Halder | Assistant Professor

Calculating Depreciation – Double Declining Balance Method

DDB- Instantaneous Formula
• Here the depreciation is calculated on the basis of the undepreciated • The formulae for depreciation (Dt) and book value (Bt) for any specific
balance, rather than the book value. given time frame (t) is as follows –
• The method does not usually take into account the salvage value of the asset. – Depreciation
In case there is a salvage value, that becomes lower bound of the revised
book value. – Book Value
• The rate of depreciation is considered as 2/N (N = service life of the asset)
• Here the annual rate of depreciation is exactly double than that of single line – K = 2/n
method.
• Annual rate of depreciation (R ) = 2/N
• Annual Depreciation for the year m (D ) = BV XR
• Book Value of the Asset for the year ( BV ) = BV -D

| Aritra Halder | Assistant Professor | Aritra Halder | Assistant Professor

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 12-04-2023

Double Declining Balance Method Calculating Depreciation – Sinking Fund Method

• Asset having initial cost of Rs. 2 Lakh, Salvage value of 50000/- at the end of economic life
• The idea is to maintain enough funds to be able to replace the asset at the
of 5 years. Determine the annual depreciation and the book value at the end of each year
end of the service life.
during the economic life of the equipment.
• This method works in the ‘sinking fund factor’ which is determined on the
Opening Book Annual Rate of Annual Closing Book basis of initial and salvage values, service life and rate of compound interest.
Year (m) • Given the initial cost, service life and the salvage value along with the rate of
Value (BVm-1) Depreciation (Rm) Depreciation (Dm) Value (BVm)
interest, we need to calculate the quantum of equal installments which if
0 0 0 0 200000 invested at a rate equal to the interest rate, will yield a sum equal to the
1 200000 0.40 80000 120000 depreciated value of the asset at the end of the service life.
2 120000 0.40 48000 72000 • There are standard tables available to give the required coefficient of
installment. (Sinking Fund Deposit Factor) (A|F, i, N) = i/[(1+i)n - 1]
3 72000 0.40 28800 (22000) # 43200 (50000) # • This is the factor by which a future sum (F) is multiplied to find a uniform
4 50000 0.40 - 50000 sum (A) that should be set regularly such that the final value of the funds set
5 50000 0.40 - 50000 aside is F.

| Aritra Halder | Assistant Professor | Aritra Halder | Assistant Professor

SFDF From CIF Table Sinking Fund Method

• Asset having initial cost of Rs. 2 Lakh, Salvage value of 50000/- at the end of economic life
of 5 years. Determine the annual depreciation and the book value at the end of each year
during the economic life of the equipment.
• From Table, SFDF = 0.1638
• Installment = 0.1638*(200000-50000) = 0.1638*150000 = 24570

End Of Year Fixed Depreciation Interest Net Depreciation (Dm) BV

0 0 0.00 200000.00
1 24570 0.00 24570.00 175430.00
2 24570 2457.00 27027.00 148403.00
3 24570 2702.70 29729.70 118673.30
4 24570 2972.97 32702.67 85970.63
5 24570 3270.27 35972.94 49997.69 = (50000)

| Aritra Halder | Assistant Professor | Aritra Halder | Assistant Professor

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 12-04-2023

Service Output Method Service output method - Illustration

• The first cost of a road laying machine is Rs. 8000000. Its salvage value after 5
• In certain situations depreciation is not possible to be computed years is Rs. 50000. The length of the road that can be laid in its life time is
based on time period. 75000 km. In its 3rd year of operation, the length of road laid is 2000 km. Find
• In such cases, depreciation is computed based on service rendered by the depreciation of the equipment for that year.
the asset.
• P = Initial Investment
• F = Salvage Value
• X = Maximum Capacity of service of the asset during its lifetime.
• x = Quantity of service rendered in a period.
• Depreciation per unit of service rendered: (P-F)/X
• Depreciation for x units of service in a period = (P-F)*x/X

| Aritra Halder | Assistant Professor | Aritra Halder | Assistant Professor

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| Aritra Halder | Assistant Professor