Depreciation

By: Ibrahim Kaplan

 Outline
• Depreciation concept
• Depreciation definition
• Depreciation objectives
• The causes of depreciation
• How to calculate depreciation
• Depreciation Methods
 Depreciation Concept

• Depreciation is the effect of decreased profitability or reduced service

gain as a result of the utilization of fixed assets.
• A permanent decrease in the value of fixed assets due to corrosion from
their use in the market.
• Depreciation is a vital aspect of financial statements and allows businesses
keep their cash report and balance sheet balanced and accurate.
 Depreciation definition

• Depreciation is a way of spreading the cost of real goods over the lifespan
of the asset in a gradual and reasonable manner.
• In other words, depreciation is the method of subtracting the net expense
of a costly item you purchased for your business. You write off pieces of
this over period rather than paying it all in one fiscal cycle.
• To be assigned costs = Acquisition Cost (buying Price) – Value of Salvage
 Depreciation objectives

The aim of the depreciation is:

• Calculation of proper profit
• Demonstrating the assets its reasonable value
• Providing a replacement for the asset
• Depreciation is allowed to be deducted and cut for the purposes of tax.
• Keeping the asset's initial money investment safe.
 The causes of depreciation

• Wear and tear: almost any asset will break down over a period of time.
• Perishability: Some assets have a very short lifespan.
• Rights of usage: some assets may be a right to use for a fixed period such
as software or database.
• Natural resource usage: If a commodity is made up of natural resources,
such as an oil and gas field, depreciation occurs as the resource is
depleted.
 How to calculate depreciation

Historical cost or other

approximate Depreciable
amount substituted for
residual value amount
historical cost

Depreciable Depreciable
approximate
amount amount
useful life (years)
 Depreciation Methods
• There are several types of depreciation methods. The following are the
most famous depreciation methods:
1. Straight line method
2. Double declining balance
3. Units of production
4. Sum of years digits
 Straight Line Method

• The most general and easiest way of measuring depreciation cost is

straight-line depreciation. The expenditure rate will be the same every
year over the asset's useful life in straight-line depreciation.
• Formula: Depreciation expense per year= (Cost – Salvage value) / Useful
life per year.
 Straight Line Method Example
• ex: a textile company buys a machine for 100,000 TL and the useful
lifespan is of the machine is 5 years, and the residual 20,000 TL.
• Depreciation expense per year= (100,000 TL-20,000TL) / 10 = 16,000 TL
• As a result, the company will take 16,000 TL every year as depreciation
expense for the next 5 years.
 Straight Line Method Example
Year Book Value (Beginning Depreciation Book Value (End of the
of the year) year)

1 100,000.00 TL 16,000. TL 84,000.00 TL

2 84,000.00 TL 16,000.00 TL 68,000.00 TL

3 68,000.00 TL 16,000.TL 52,000.00 TL

4 52,000.00 TL 16,000. TL 36,000.00 TL

5 36,000.00 TL 16,000.TL 20,000.00 TL

 Straight Line Method Example
• It's worth noting that the machine's book value at the end of year 5 is the
same as the salvage value. The value of an object can depreciate to its
salvage value over its useful life.
 Double Declining Balance Method

• The double declining balance depreciation method is a form of accelerated

depreciation that doubles the regular depreciation approach. It's
commonly used to accelerate the depreciation of fixed assets in the early
years, allowing the corporation to delay income taxes to later years.
• Using this method, the depreciation will be:
• Formula: 2 X Cost of the asset X Depreciation rate or
• Formula: 2 X Cost of the asset/Useful Life
Double Declining Balance Method Example

• Suppose a factory bought a machine for 100,000 TL. The factory has
estimated that the useful life of the machine will be 8 years with salvage
value of 11,000 TL.
• Double declining balance formula = 2 X Cost of the asset X Depreciation
rate.
• It will be: 2 x 12.5% = 25%
Double Declining Balance Method Example

• the depreciation balance sheet for 8 years will be:

Year Book value Depreciation Book value (end of
( beginning of the the year)
year)
1 100,000 TL 25,000 TL 75,000 TL
2 75,000 TL 18,750 TL 56,250 TL
3 56,250 TL 14,063 TL 42,188 TL
4 42,188 TL 10,547 TL 31,641 TL
5 31,641 TL 7,910 TL 23,730 TL
6 23,730 TL 5,933 TL 17,798 TL
7 17,798 TL 4,449 TL 13,348 TL
8 13,348 TL 2,348 TL 11,000 TL
Units of Production Depreciation Method
• Depreciation cost on an asset is paid according to its real use in the units
of production form of depreciation. When using the units of output
process, higher depreciation is charged when there is more activity and
lower depreciation is charged when there is less activity.
• Formula: Depreciation Expense = Cost – Residual Value/Estimated Units
of Output.
 Units of Production Depreciation Example
• An organization purchased a car for 52,000 TL. Its estimated milage
(Units of Output) for 5 years is ten thousand miles, distributed as below:
First year Second year Third year Fourth year Fifth year
4000 miles 2500 miles 1500 miles 1000 miles 1000 miles

• The Residual Value after 5 years is 2000 TL. Calculate the Depreciation
expenses and book Value for each year ( 5 years in total)
 Units of Production Depreciation Example
(continued)
• Depreciation Expense = Cost – Residual Value/Estimated Units of Output.
= (52,000 – 2,000)/10,000 = 5 TL per mile
Years Depreciation Expense (TL) Book Value (TL) at the year
end
0 52,000
1 4,000 x 5 = 20,000 52000 – 20000 = 32,000
2 2,500 x 5 = 12,500 32000 – 12500 = 19,500
3 1,500 x 5 = 7,500 19500 – 7500 = 12,000
4 1,000 x 5 = 5,000 12000 – 5000 = 7,000
5 1,000 x 5 = 5,000 7000 – 5000 = 2,000
 Sum of Years Digits Method

• To improve the identification of depreciation, the sum of the years' digits

procedure is being used. As a result, the majority of an asset's loss is
recognized for the first few years of its usable existence. It is also called
SYD method.
• Formula:
 Sum of Years Digits Method Example
• An energy drink company has bought a machine on 3rd of January 2015
with the following information:
Machine cost: 250,000 TL
Expected machine useful life : 5 years
Value of the salvage : $25,000
• Required: Prepare a schedule showing the depreciation expense of each
year of the useful life of the machine using sum of years’ digits method.
 Sum of Years Digits Method Example
(continued)
• Solution
Year Depreciation Remaining Depreciation Depreciation Book Value
base machine life fraction expense
1 225,000 TL 5 5/15 75,000 TL 175,000 TL
2 225,000 TL 4 4/15 60,000 TL 115,000 TL
3 225,000 TL 3 3/15 45,000 TL 70,000 TL
4 225,000 TL 2 2/15 30,000 TL 40,000 TL
5 225,000 TL 1 1/15 15,000 TL 25,000 TL
225,000 TL
 Sum of Years Digits Method Example
(continued)
• Depreciable cost (depreciable base): $250,000 – $25,000 = $225,000
• Depreciation expense at the end of the first year: $225,000 × (5/15) =
$75,000
• Book value at the end of the first year: $250,000 – $75,000 = $175,000
• It's worth noting that the depreciation burden reduces as the machine's
remaining life decreases.
Thanks for the attention!