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Different Methods used to Determine Depreciation
2024-05-08 08:27:10
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Depreciation
Depreciation is the gradual exhaustion of
the usefulness of a property. This may be defined as the decrease or loss in
the value of a property due to structural deterioration use, life wear and
tear, decay and obsolescence, etc. If the amount of depreciation being known,
the present value of property can be calculated after deducting the total
amount of depreciation from the original cost. The depreciation may be
physical, functional or locational.
There are following methods are used to determine depreciation.
1.
Straight line method – In this method, it
is assumed that the property loses its value by the same amount every year. A
fixed amount of the original cost is deducted every year, so that at the end of
the utility period only the scrap value is left.
Annual depreciation (D)= (original
cost i.e. construction or purchase (C) – scrap or salvage value (S))/life in
year (n)
Thus the book
value after the number of years say N years = original cost – N*D
2.
Constant percentage method or declining
balance method - In this method, the property will lose its value by a constant
percentage of its value at the beginning of every year. Thus D = 1-(S/C)1/n or D % rate of annual depreciation. Then the value of
structure = C (1-D)n
3.
The depreciated value of building can be
found by D= p (1- rd/100) n, where as D is depreciated
value, p is present market value, n is number of years, the building had been
constructed rd is the fixed percent of depreciation and its value may be taken
as 1, 1.30, 2 and 4 for 100, 75, 50, and 25 years life respectively.
4.
Sinking fund method for depreciation
Annual sinking
fund = i/(i+1)n -1, where n is life of structure and an amount of
Rs.1 per annum in n year =(i+1)n-1/i.
The product of
these two values gives the rate of depreciation for n year.
The present value of land and water supply,
electric and sanitary fittings etc should be added to the valuation of the
building to arrive at total cost of property.
Estimate
Valuation
Depreciation
usefulness of property
decease of property
loss of property
deterioration
wear and tear
book value
scrap value
salvage value
life in year
annual depreciation
decay and obsolescence
straight line method
constant percentage method
original cost
present cost
functional value
sinking fund
declining balance
