depriciation final presentation

7/28/2019 Depriciation Final Presentation

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Presentation

Financial

Accounting


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Muhammad Afzal 11-Arid-830

M.Tufail Madni 11-Arid-842

Ishfaq Ahmad 11-Arid-820

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Group Members:


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Fixed Assets and Depreciation

Objectives:

1. Definition

2. Causes

3. Factors

4. Methods


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Defination of Depreciation

Depreciation is defined as the expensing

of the cost of an asset involved in

producing revenues throughout its useful

life.Assets depreciate for two reasons:

Wear and Tear

Obsolescence


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Depreciation

Depreciation is calculated as follows:

The original cost of the asset, including costs

of acquiring the asset, transporting it, and

setting it up

Less the salvage value

Divided over the years of useful life of the

asset.


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1. Depreciable Assets

2. Non-Depreciable Assets

Feehold Land

Leasehold Land

Investment Property

Depreciation


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You can depreciate property only if it meets thefollowing requirements:

It is used in business or held for the production of income.

It must be expected to last for more than one year. In otherwords, it must have a useful life that extends substantially

beyond the year it was placed in service. It is property that wears out, decays, gets used up, becomes

obsolete, or looses value from natural causes.

Depreciable property can be either tangible or

intangible.

What can be depreciated?


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Tangible Depreciable Property

Purchased property you can see or touchLivestock (purchased)

Machinery

Buildings and improvements, fences

Dams, ponds, or terraces

Irrigation systems and water wells

Partial business use

You can claim depreciation on the part of a vehicle

used in the business.


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When depreciation begins & ends?

Begins

When you place the property in

service.

When it is ready and available for aspecific use in the business

Example

When it was bought for thebusiness

Ends

When the cost of the item has been

recovered or when it is retired from

service, whichever happens first

Example

When it is sold or is not longer

useable


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Causes of depreciation

Custom or usage With some types of fixed assets for example cars

and other vehicles ,there are customs which have

been established,on the rate of wear and tear

normally expected every year

Abnormal occurences

Accidents

Defects in materials


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Causes of depreciation

Excessive wear and tear

Contingent occurences

Technological developments New equipments superceding the existing ones

eg:calculators replacing abacus

Change in manufacturing methods

Obsolecscence


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Factors of Depreciation

1) Cost of asset (include expenses and capital expenditureincurred eg. The installation fees, the legal fees)

2) Estimated useful life of asset

This is the number of years that the asset is expected to be used)

3) Residual or scrap value of the asset

This is the value of the asset at the end of its life.

4) Method of calculating depreciation


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Methods of Depreciation

The depreciation expense can also be calculated by writingoff a fixed percentage of cost of the asset.

Straight-line depreciation produces a constant depreciationexpense. At the end of the asset's useful life, the asset isaccounted for in the balance sheet at its salvagevalue.

1- Straight-Line Depreciation Method


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2- Declining Balance Method

The double-declining balance method is a type

of accelerated depreciation method thatcalculates a higher depreciation charge in the

first year of an asset's life and gradually

decreases depreciation expense in subsequent

years.



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3- Composite Depreciation Methodo The composite method is applied to a collection of

assets that are not similar, and have different service

lives.

o For example, computers and printers are not similar,

but both are part of the office equipment.

o Depreciation on all assets is determined by using thestraight-line-depreciation method.



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Depreciation should be charged as follows:

Year 1 (CostResidual value) x n / Sum of digits

Year 2 (CostResidual value) x (n-1) / Sum of digits



Year n (CostResidual value) x 1 / Sum of digits

With diminishing years

of life to run



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With diminishing years

of life to run


ExampleCost of asset $9,000

No scrap value

Estimated useful life 5 years

Sum of digits = 5(5+1) / 2 = 15

Depreciation charge:

Year 1 $9,000 x 5/15 = $3,000 Year 2 $9,000 x 4/15 = $2,400

Year 3 $9,000 x 3/15 = $1,800 Year 4 $9,000 x 2/15 = $1,200

Year 5 $9,000 x 1/15 = $ 600


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depriciation final presentation

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