DEPRECIATION

Depreciation is defined as the decrease in the value

of property, such as machinery, equipment,
building or other structure, due to the passage of
time.
Excluded from this definition are properties whose values
increase with time, such as antiques, paintings of the
masters, rare stamp, and rare coins and in most cases, land.
TYPE OF DEPRECIATION

Physical depreciation
 Deterioration
 Wear and tear

Functional depreciation
 Inadequacy of the equipment
 Obsolescence caused by the invention of more efficient equipment and machines to perform
the same task
 Changes in methods of production
 Changes in styles and designs of the goods produced on the equipment
 Transfer of population due to various causes

Changes in the price levels of similar property.

THE STRAIGHT-LINE and SINKING FUND FORMULA (SYMBOLS)

n = useful life of the property in years

m = age of the property at any time less than of m ≤ n
d = annual cost of depreciation
Dm =accrued or total depreciation up to m years
CO = original or first cost of the property
Cm = book value of the property at the end of m years
Cn = book value at the end of life, n years (salvage or scrap value)
PROBLEM #1

The original cost of a certain piece of equipment is

P150, 000 and it is depreciated by a 10% sinking
fund method. Determine the annual depreciation
charge if the book value of the equipment after 10
years is the same as if it had been depreciated at
P14,000 each year by straight-line formula.
Given:
C1o=P250,000
C2o=P15000
D1m=P40,000
D2m=P7500

• SOLUTION
• C1m=C1o - D1m
• C1m=P250000 - P40000 = P210000
• C2m=C2o - D2m
• C2m=P15000 - P7500=P7500
• Cm=C1m - C2m
• Cm=P210000 + P7500=P217500