Depreciation is amount decrease in value of Fixed assets and charged in to operational Expenses over the life of assets. In other words we can say that depreciation is decrease in the value of the assets due to use,obsolance,wear and tear

Depreciation is required both for

(1) Accounting Purpose

(2) Tax purpose

Here I am providing you ,a very easy way to understand various depreciation method and its Journal Entry

Q What is the accounting journal entry for   depreciation

Answer:

 

For example PQR  Company calculates that it should have $1,000 of depreciation expense . The entry is:

Date	Description	Debit	Credit
31-Dec-16	Depreciation Expenses	1000
	To accumulated Depreciation		1000

 

or you can pass the entry in the following way

Date	Description	Debit	Credit
31-Dec-16	Depreciation Expenses	1000
	T0 Assets		1000

 

Now we will check different depreciation method

Following are listed Depreciation method

1. Straight line method
2. Double Declining method
3. Sum-of-the-years’-digits method
4. Annuity method
5. Machine hour rate method

(1)Straight line method

This is also known as fixed percentage method .In this method  equal amount is allocated for each accounting period as depreciation expensses.The formula of straight line method of depreciation is cost minus Salvage value divided by years of life

=( Cost-salvage Value) / Useful life

Example

fixed asset having a useful life of 5 years is purchased on 1 January 2012. Cost of the asset is $11,000 whereas its residual value is expected to be $1000.

Calculation  of  depreciation under Straight line method

=11000-1000/5

=2000 Depreciation  each year

Year	Opening Balance	Depreciation	Closing Balance
1	11000	2000	9000
2	9000	2000	7000
3	7000	2000	5000
4	5000	2000	3000
5	3000	2000	1000
Sale			-1000
Balance			0

 

(2)Double Declining Method

This is accelerated  method of depreciation in which higher depreciation is recognized during the first few years of its useful life. This method is used under the following cases

(1) when the use of assets is at  rapid rate during the early part of its useful life;

(2)When company wants to recognize more expense at early stage, thereby shifting profit recognition further into the future (which may be of use for deferring income taxes).

There are two approach one is accelerated depreciation by 200% and another is accelerated by 150%

Double-declining balance (ceases when the book value = the estimated salvage value)

2  ×  Straight-line depreciation rate  ×  Book value at the beginning of the year

Or if accelerated by 150% then the formula will be as follow

 

1.5×  Straight-line depreciation rate  ×  Book value at the beginning of the year

Now we will see the example

Take the above straight line case , in this case the rate of depreciation is 20%

so in double declining we take 40% i.e.2  x 20%,Ckeck the following

 

 

Year	Initial Cost	Depreciation rate	Depreciation	Ending value
1	11000	40%	4400	6600
2	6600	40%	2640	3960
3	3960	40%	1584	2376
4	2376	40%	950.4	1425.6
5	1425.6	40%	425.6	1000

Last year depreciation amount is adjusted to the Salvage value

(3) Sum-of-the-years’-digits method

This method of depreciation is another method of accelerated depreciation. Depreciation is calculated  as a fractional part of a sum of all the years.

Example:

In the above example if we apply Sum-of-the-years’-digits method then  an asset has a life of 5 years and total is 15 calculated as 1+2+3+4+5 = 15

Now see the following table

Year	Time remaining	SYD	Applicable rate	Annual Depriciation
1	5	5/15	33.33%	3333
2	4	4/15	26.67%	2667
3	3	3/15	20%	2000
4	2	2/15	13.33%	1333
5	1	1/15	6.67%	667
				10000

 

(4) Annuity method of depreciation

The other method of depreciation do not take into account the interest lost on capital invested in the asset. This Annuity Method Consider this.

In this annuity method an interest at  fixed rate on the opening balance of asset is debited to asset account each year and then the cost of asset together with interest thereon is written off equally over the life of the asset

Example

Suppose a lease is purchased on 1–1-2011 for the 4   years for the cost of 10,000 .Company proposed to  depreciate lease by annuity method by charging interest at 5 %.Annuity table shown to  $1 for 4 years at the rate of 5% you must written off sum of 0.2820 each year. the whole calculation for the 4 year

Debit		Lease Account		Credit
1/1/2011	To Bank A/C	10000		By Depreciation A/c	2820
31/12/11	To Interest A/C (5 %on 10,000)	500		By Balance C/f	7680
		10500			10500
1/1/2012	To Balance B/d	7680		By Depreciation A/c	2820
31/12/12	To Interest A/C ((5 %on 7680)	384		By Balance C/f	5244
		8064			8064
1/1/2013	To Balance B/d	5244		By Depreciation A/c	2820
31/12/13	To Interest A/C	262		By Balance C/f	2686
		5506			5506
1/1/2014	To Balance B/d	2686		By Depreciation A/c	2820
31/12/14	To Interest A/C	134			0
		2820			2820

 

1. (5) Machine hour rate method

This method is mostly used  where the work is performed primarily on machines. First of all you need to calculate  total life of any fixed asset on the basis of its working hours life. Now divide the cost less salvage value by total hours. Now we have obtain the depreciation rate per hour. Annual depreciation is equal to working hours of fixed assets in year with depreciation rate per hour. Check out the following formula

Hourly depreciation rate

=Cost-salvage value  / Estimated life of machine in hours

Depreciation rate per year

=Working of the hours for the year x Hourly depreciation rate

 

Suppose fixed asset having a useful life of 5 years is purchased on 1 January 2012. Cost of the asset is $16,000 whereas its residual value is expected to be $1000.and the working hours during the life is 15000 and for particular year is 3500,3500,3000,2500,2500

Check out the following table for per year depreciation

Hourly depreciation rate

=16,000-1000  / 15000

=1 per Hour

Depreciation  1st year

=3500 X1

=3500

Year	Hour	Dep. Rate per Hour	Annual Depreciation
1	3500	1	3500
2	3500	1	3500
3	3000	1	3000
4	2500	1	2500
5	2500	1	2500

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