📘 Depreciation Accounting Notes
1. Introduction to Depreciation
Definition: Depreciation is the systematic allocation of the cost of a tangible fixed asset
over its useful life.
Reason: Assets lose value due to wear and tear, usage, obsolescence, or passage of time.
Objective: To match the cost of using an asset with the revenue it generates (Matching
Principle).
Key Points:
Depreciation is a non-cash expense.
Depreciation affects Net Income (reduces profit) and Balance Sheet value of assets.
The portion of cost charged each year = Depreciation Expense.
2. Straight-Line Method (SLM)
Formula
Example
Machine cost = $50,000
Residual value = $5,000
Useful life = 5 years
,Table
Year Opening Balance Depreciation Closing Balance
1 50,000 9,000 41,000
2 41,000 9,000 32,000
3 32,000 9,000 23,000
4 23,000 9,000 14,000
5 14,000 9,000 5,000 (Residual)
3. Reducing Balance Method (Diminishing Balance)
Formula
Example
Asset cost = $50,000
Depreciation rate = 20%
Table
Year Opening Balance Depreciation (20%) Closing Balance
1 50,000 10,000 40,000
2 40,000 8,000 32,000
3 32,000 6,400 25,600
4 25,600 5,120 20,480
5 20,480 4,096 16,384
, Note: Residual value may not be reached exactly.
4. Units of Production Method
Formula
Example
Machine cost = $100,000
Residual value = $10,000
Expected production = 90,000 units
Actual production: Year 1 = 20,000 units; Year 2 = 30,000 units; Year 3 = 40,000 units
Table
Year Units Produced Depreciation Accumulated Depreciation Closing Value
1 20,000 20,000 20,000 80,000
2 30,000 30,000 50,000 50,000
3 40,000 40,000 90,000 10,000 (Residual)
1. Introduction to Depreciation
Definition: Depreciation is the systematic allocation of the cost of a tangible fixed asset
over its useful life.
Reason: Assets lose value due to wear and tear, usage, obsolescence, or passage of time.
Objective: To match the cost of using an asset with the revenue it generates (Matching
Principle).
Key Points:
Depreciation is a non-cash expense.
Depreciation affects Net Income (reduces profit) and Balance Sheet value of assets.
The portion of cost charged each year = Depreciation Expense.
2. Straight-Line Method (SLM)
Formula
Example
Machine cost = $50,000
Residual value = $5,000
Useful life = 5 years
,Table
Year Opening Balance Depreciation Closing Balance
1 50,000 9,000 41,000
2 41,000 9,000 32,000
3 32,000 9,000 23,000
4 23,000 9,000 14,000
5 14,000 9,000 5,000 (Residual)
3. Reducing Balance Method (Diminishing Balance)
Formula
Example
Asset cost = $50,000
Depreciation rate = 20%
Table
Year Opening Balance Depreciation (20%) Closing Balance
1 50,000 10,000 40,000
2 40,000 8,000 32,000
3 32,000 6,400 25,600
4 25,600 5,120 20,480
5 20,480 4,096 16,384
, Note: Residual value may not be reached exactly.
4. Units of Production Method
Formula
Example
Machine cost = $100,000
Residual value = $10,000
Expected production = 90,000 units
Actual production: Year 1 = 20,000 units; Year 2 = 30,000 units; Year 3 = 40,000 units
Table
Year Units Produced Depreciation Accumulated Depreciation Closing Value
1 20,000 20,000 20,000 80,000
2 30,000 30,000 50,000 50,000
3 40,000 40,000 90,000 10,000 (Residual)
