Depreciation methods

 Depreciation Methods

What is Depreciation?


Depreciation is the reduction in the value of a fixed asset over time due to:

Use

Wear and tear

Passage of time

Obsolescence (becoming outdated)


Example: A machine bought for ₹1,00,000 will not remain the same value forever. Its value decreases every year — this decrease is called depreciation.
Methods of Depreciation


1. Straight Line Method (SLM)


Under this method, the same amount of depreciation is charged every year.

Formula:
Depreciation = (Cost of Asset – Scrap Value) ÷ Useful Life

✅ Simple and easy to calculate
✅ Equal depreciation every year

Example:
Machine cost = ₹10,000
Life = 5 years
Depreciation per year = ₹2,000

2. Written Down Value Method (WDV)


In this method, depreciation is charged on the reduced value of the asset each year.

So, depreciation decreases every year.

✅ Higher depreciation in early years
✅ Lower depreciation later

Example:
If depreciation rate is 10%:

Year 1: 10% of 10,000 = 1,000

Year 2: 10% of 9,000 = 900 and so on.

3.Units of Production Method


Depreciation is based on how much the asset is used, not time.

✅ Depends on usage
✅ Suitable for machines

Example:
If a machine produces 10,000 units and depreciation is ₹10,000,
Then depreciation per unit = ₹1 per unit.

4. Sum of Years Digits Method


More depreciation is charged in early years and less in later years.

Mostly used when asset loses value quickly.

5. Annuity Method


Depreciation is calculated considering interest on capital invested.

Used for long-term assets.



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