1. DEPRECIATION

2. DEPRECIATION CONCEPT AND DEFINITION OF DEPRECIATION
CAUSES OF DEPRECIATION

3. LEARNING OUTCOMES:
At the end of the lesson, students should be able to:
understand the concept and definition of depreciation.
understand and explain the causes of depreciation.
relate depreciation to National Education.

4. FIXED ASSETS Assets acquired not for resale.
Help to earn revenue for more than 1 financial year.
Examples :
- A printing machine in a printing company.
- A van in a courier service company.

5. DEFINITION OF DEPRECIATION
Applies only to fixed assets.
The whole cost of the fixed assets must be spread over
its useful life.
The portion of the cost allocated to a particular accounting
period is charged as an expense against revenue
(Matching principle).
This portion of the cost is called Depreciation.

6. CAUSES OF DEPRECIATION
Physical Deterioration
Obsolescence
Depletion of an asset
Passage of Time

7. PHYSICAL DETERIORATION
Caused by physical wear and tear
- rust, erosion, rot and decay
Examples - office furniture
- printing machines

8. Fixed assets become out-of-date
OBSOLESCENCE
Fixed assets become out-of-date
- when new model or more efficient tool come into existence.
Pentium I
Pentium IV
Examples - cars
- computers

9. DEPLETION OF FIXED ASSETS
An asset that depletes over time as resources
are extracted from it.
Little Guilin
Examples - Gold mines
- Quarries
- Little Guilin is a depleted granite quarry now
turned into a beautiful lake.

10. PASSAGE OF TIME Some assets confer upon their holders the
exclusive rights to enjoy certain privileges
for a fixed period of time.
Examples - copyrights
- patent rights
- leases on land

11. NATIONAL EDUCATION
10-year depreciation policy on all vehicles including buses
in Singapore.
Very high depreciation.
Majority of people move around by bus.
Buses are in good condition and comfortable.
Few breakdowns, less traffic jam and air pollution.
An excellent public transport.
No one owes us a living
We must appreciate it and work hard for the nation.

12. HOMEWORK
GCE ‘O’ Level Principles of Accounts
Nov 2000 Q2(b).

13. STRAIGHT LINE
METHOD OF
DEPRECIATION

14. LEARNING OUTCOMES:
At the end of the lesson, students should be able to:
understand the features of Straight Line Depreciation method.
understand the advantages and disadvantages of Straight
Line Depreciation method.
calculate depreciation using Straight Line method.
record depreciation in the books using the Provision for
Depreciation method.

15. METHODS OF DEPRECIATION
Straight-Line
Reducing Balance
Revaluation

16. STRAIGHT LINE METHOD
A fixed asset is depreciated by an equal amount per year.
Example:
If an asset is depreciated by $1,000 in the first full year of
usage, it will also be depreciated by $1,000 in the second
year; $1,000 in the third year and this continues annually
until it is fully depreciated.

17. STRAIGHT LINE METHOD Advantages Disadvantage - Easy to calculate.
- Easy to understand.
Disadvantage
- Assumes fixed asset gives same amount of service annually
throughout its useful life.

18. STRAIGHT LINE METHOD (I)
A machine X costs $20,000 is expected to last 4 years.
At the end of the 4th year, it can be sold for $2,000 as scrap.
( Scrap value is the same as residual value.)
Original cost - Residual value
Expected useful life
Depreciation per year =
20,000
- 2000 = 4
= $4,500

19. STRAIGHT LINE METHOD (I)
A printing machine costs $17,000 is expected to last 5 years.
At the end of the 5th year, it can be sold for $2,000 as scrap.
Original cost - Residual value
Expected useful life
Depreciation per year = =
17,000
- 2,000 5
= $3,000

20. STRAIGHT LINE METHOD (II)
An office equipment costs $5,000 is expected to depreciate by
20% per annum.
Depreciation per year =
Rate of depreciation x Original cost =
100
X 5,000
= $1,000.

21. STRAIGHT LINE METHOD (II)
An office equipment costs $25,000 is expected to depreciate by
10% per annum.
Depreciation per year =
Rate of depreciation x original cost
= 10
100
X 25,000 .
= $2,500

22. CALCULATION OF RATE OF DEPRECIATION: Depreciation of machine X = $500.
Original cost of machine X = $5,000.
Rate of depreciation =
Depreciation x 100%
Original cost =
X 100
5,000
= 10%

23. STRAIGHT LINE METHOD
Mach Cost Scrap value Useful life Annual dep. Rate of dep.
X $5, Nil years
Y $10, $1, years
Z $8, Nil years
$500
10%
$1,800
18%
$1,600
20%

24. STRAIGHT LINE METHOD
Mach Cost Scrap value Useful life Annual dep. Rate of dep.
X $1, Nil years
Y $5, $ years
Z $10, $1, years
$ %
$ %
$ %

25. STRAIGHT LINE METHOD
Mach Cost Scrap value Useful life Annual dep. Rate of dep.
X $10, $1, years
$ %
Y $1, Nil
$400
25%
4 years
Z $1,000
Nil
5 years $200
20%
Next table y z

26. MACHINE Y
Original cost = $1,600
Scrap value = nil
Depreciation = $400
Depreciation = Original cost - scrap value
Useful life
= 1,
Useful life
Useful life = 1,600
400
= 4 years

27. MACHINE Z
Original cost = $1,000
Useful life = 5 years
Depreciation = $200
Depreciation = Original cost - scrap value
Useful life
= 1, scrap value 5
1, = 1, scrap value
Scrap value = 0

28. STRAIGHT LINE METHOD
Mach Cost Scrap value Useful life Annual dep. Rate of dep.
A $2, Nil $250
8 years
12.5%
B $5, $ %
9 years
$500
C Nil years $800
$4,000
20%
Record depreciation A B C

29. MACHINE A
Original cost = $2,000
Scrap value = nil
Depreciation = $250
Depreciation = Original cost - scrap value
Useful life
= 2,
Useful life
Useful life = 2,000
250
= 8 years

30. MACHINE B
Original cost = $5,000
Scrap value = $500
Rate of Depreciation = 10%
Depreciation = Rate of depreciation x Original cost
= x 5,000
100
= $500
Depreciation = Original cost - scrap value
Useful life
= 5,
Useful life
Useful life = 4,500
500
= 9 years

31. MACHINE C
Useful life = 5 years
Scrap value = nil
Depreciation = $800
Depreciation = Original cost - scrap value
Useful life
= Original cost 5
Original cost = 800 x 5
= $4,000

32. DEPRECIATION IN THE BOOKS
RECORDING
DEPRECIATION IN THE BOOKS
- Provision for depreciation method
Example:
An office equipment was bought for $16,000 on 1 Jan 1999.
It is expected to have a useful life of 8 years with zero residual
value. Using straight line depreciation method, show the
records on your books for 2 years.

33. Office equipment 1999 Jan 1 Bank $16,000 1999 Dec 31 Bal. c/d $16,000
2000
Jan 1 Bal. b/d $16,000
2000
Dec 31 Bal.c/d $16,000
2001
Jan 1 Bal. b/d $16,000
B/S

34. Provision for depreciation - office equipment
1999
Dec 31 Prov. for dep $2,000
1999
Dec 31 P&L a/c $2,000
2000
Dec 31 P&L a/c $2,000
2000
Dec 31 Prov.for dep $2,000
Provision for depreciation - office equipment
P&L
1999
Dec 31 Bal. c/d $2,000
1999
Dec 31 Depreciation $2,000
2000
Jan 1 Bal. b/d $2,000
2000
Dec 31 Bal. c/d $4,000
Dec31 Depreciation ,000
$4,000
$4,000
2001
Jan 1 Bal. b/d $4,000
B/S

35. P & L a/c for year ended 31 Dec 2000
1999
Dec 31 Depreciation $2,000
P & L a/c for year ended 31 Dec 2000
2000
Dec 31 Depreciation $2,000
Dep

36. Fixed asset Office equipment $16,000 Less Prov. for dep. 2,000 $14,000
Balance Sheet as at 31 Dec 1999
Fixed asset
Office equipment $16,000
Less Prov. for dep , $14,000
Balance Sheet as at 31 Dec 2000
Fixed asset
Office equipment $16,000
Less Prov. For dep , $12,000
Dep
O/E

37. IMPORTANT FEATURES: Fixed asset account shows original cost of asset.
Provision for Depreciation account shows
accumulated depreciation of fixed asset.
Net book value of fixed asset (in Balance Sheet)
is original cost less Provision for Depreciation.

38. HOMEWORK
Textbook Betsy Li p319 Q7.
GCE ‘O’ Level Principles of Accounts
November 1998 Section B Q7.

39. REDUCING
(OR DIMINISHING)
BALANCE METHOD OF
DEPRECIATION

40. LEARNING OUTCOMES:
At the end of the lesson, students should be able to:
understand the features of Reducing Balance Depreciation
method.
understand the advantages and disadvantages of Reducing
Balance Depreciation method.
calculate depreciation using Reducing Balance method.
record depreciation in the books using the Provision for
Depreciation method.

41. REDUCING BALANCE METHOD
The amount of depreciation per year diminishes with
every successive year.
Example:
- If an asset is depreciated by $2,000 in the first full year
of usage, it will be depreciated by less than $2,000
(eg $1,600) in the second year; and even less (eg $1,300)
in the third year. This continues until it is fully depreciated.

42. REDUCING BALANCE METHOD
Advantage
- Overall expenses ( including repairs and maintenance)
charged for the use of a fixed asset would be fairly
constant.
Disadvantages
- Difficult to calculate.
- Assets are always left with a small value at the end of
useful life.

43. REDUCING BALANCE METHOD
Depreciation per year
= Rate of depreciation
X Net book value at beginning of
accounting period
Net book value = Original cost - Accumulated depreciation
Accumulated depreciation is the sum of the yearly depreciation.

44. REDUCING BALANCE METHOD
A machine Y costs $10,000 is depreciated at 20% per annum
on the reducing balance method. Show depreciation for the
first 3 years.
Net Book
Value
Depreciation 20
100
Year 1
Year 2
Year 3
X 10,000
= $2,000
$10,000-2,000=$8,000 20
100
X 8,000
= $1,600
$10,000-3,600= $6,400 20
100
X 6,400
$10,000-4,880=$5,120
= $1,280

45. REDUCING BALANCE METHOD
An office equipment costs $15,000 is depreciated at 10%
per annum on the reducing balance method. Show
depreciation for the first 3 years.
Depreciation
Net Book
Value 10
100
X 15,000
= $1,500
$13,500
Year 1
Year 2
Year 3 10
100
$12,150
= $1,350
X 13,500 10
100
$10,935
= $1,215
X 12,150

46. REDUCING BALANCE METHOD
Complete the missing items in the table:
Annual depreciation
for the year ended
31 Dec 2000
Date of
purchase
Rate of
depreciation
Mach
Cost
$5, %
$500 X Y
$10, %
$1,275
$12, %
$972 Z
NEXT TABLE z y

47. REDUCING BALANCE METHOD
Machine Y
Cost = $10,000
Date of purchase =
Rate of depreciation = 15%
Depreciation
Net Book Value
Yr ended 15
100
X 10,000
= $1,500
$10,000-1,500=$8,500 15
100
X 8,500
= $ 1,275
$10,000-2,775= $7,225

48. REDUCING BALANCE METHOD
Machine Z
Cost = $12,000
Date of purchase =
Rate of depreciation = 10%
Depreciation
Net Book Value
Yr ended 10
100
X 12,000
= $1,200
$12,000-1,200=$10,800 10
100
X 10,800
= $ 1,080
$12,000-2,280=$9,720 10
100
X 9,720
$12,000-3,252=$8,748
= $972

49. REDUCING BALANCE METHOD
Complete the missing items in the table:
Annual depreciation
for the year ended
31 Dec 2000
Date of
purchase
Rate of
depreciation
Mach
Cost
$6, % X
$765 Y
$8, %
$1,024
$15, % $ Z Y X Z
Recording depreciation

50. REDUCING BALANCE METHOD
Machine X
Cost = $6,000
Date of purchase =
Rate of depreciation = 15%
Depreciation
Net Book Value
Yr ended 15
100
X 6,000
= $900
$6, =$5,100 15
100
X 5,100
= $765
$6,000-1,665= $4,335

51. REDUCING BALANCE METHOD
Machine Y
Cost = $8,000
Date of purchase =
Rate of depreciation = 20%
Depreciation
Net Book Value
Yr ended 20
100
X 8,000
= $1,600
$8,000-1,600=$6,400 20
100
X 6,400
= $ 1,280
$8,000-2,880=$5,120 20
100
X 5,120
$8,000-3,904=$4,096
= $1,024

52. REDUCING BALANCE METHOD
Machine Z
Cost = $15,000
Date of purchase =
Rate of depreciation = 10%
Yr ended Depreciation Net Book Value 10
100
X 15,000
= $1,500
$15, ,500 = $13,500 10
100
X 13,500
= $1,350
$15, ,850 = $12,150 10
100
X 12,150
= $ 1,215
$15, ,065 = $10,935 10
100
X 10,935
= $1,093.50
$15,000 -5,158.50=$9,841.50

53. DEPRECIATION IN THE BOOKS
RECORDING
DEPRECIATION IN THE BOOKS
- Provision for depreciation method
Example:
An office equipment was bought for $10,000 on 1 Jan 1999.
It is depreciated at 10% per annum on the reducing balance
method. Show the records on your books for 2 years.

54. REDUCING BALANCE METHOD
A machine costs $10,000 is depreciated at 10% per annum
on the reducing balance method.
Depreciation (10%) Net Book Value
10 x 10,000 = $1,000
100
$10,000 -1,000=$9,000
10 x 9,000 = $900
100
$10,000 -1,900 = $8,100

55. Office equipment 1999 Jan 1 Bank $10,000 1999 Dec 31 Bal. c/d $10,000
2000
Jan 1 Bal. b/d $10,000
2000
Dec 31 Bal.c/d $10,000
2001
Jan 1 Bal. b/d $10,000
B/S

56. Provision for depreciation - office equipment
1999
Dec 31 Prov. for dep $1,000
1999
Dec 31 P&L a/c $1,000
2000
Dec 31 Prov.for dep $900
2000
Dec 31 P&L a/c $900
Provision for depreciation - office equipment
P&L
1999
Dec 31 Bal. c/d $1,000
1999
Dec 31 Depreciation $1,000
2000
Jan 1 Bal. b/d $1,000
2000
Dec 31 Bal. c/d $1,900
Dec31 Depreciation
$1,900
$1,900
2001
Jan 1 Bal. b/d $1,900
B/S

57. P & L a/c for year ended 31 Dec 2000
1999
Dec 31 Depreciation $1,000
P & L a/c for year ended 31 Dec 2000
2000
Dec 31 Depreciation $900
Dep

58. Fixed asset Office equipment $10,000 Less Prov. for dep. 1,000 $9,000
Balance Sheet as at 31 Dec 1999
Fixed asset
Office equipment $10,000
Less Prov. for dep , $9,000
Balance Sheet as at 31 Dec 2000
Fixed asset
Office equipment $10,000
Less Prov. For dep , $8,100
Dep
O/E

59. IMPORTANT FEATURES: Fixed asset account shows original cost of asset.
Provision for Depreciation account shows
accumulated depreciation of fixed asset.
Book value of fixed asset (in Balance Sheet)
is original cost less Provision for Depreciation.

60. HOMEWORK
Textbook Betsy Li
- p318 Q4
- p320 Q9

61. REVALUATION
METHOD OF
DEPRECIATION

62. LEARNING OUTCOMES:
At the end of the lesson, students should be able to:
understand the features of Revaluation method of Depreciation.
understand the advantages and disadvantages of Revaluation
method of Depreciation.
calculate depreciation using Revaluation method.
record depreciation in the books using the Provision for
Depreciation method.

63. REVALUATION METHOD
The fixed asset is revalued at the end of every accounting
period.
Depreciation is the difference between the value of the fixed
asset at the beginning and end of the accounting period.
The amount of depreciation varies every year.

64. REVALUATION METHOD Example:
- An asset can be depreciated by $1,000 in the first full year
of usage, it can be depreciated by a different amount in the
second year (eg $500 ); and a different amount in the third
year (eg $1,200 ) depending on the valuation at the end of
the accounting period and the cost or valuation at the
beginning of the accounting period.

65. REVALUATION METHOD Advantage Disadvantage
- Fixed asset is shown at current or realisable value.
Disadvantage
- Time consuming and costly to value the fixed asset.

66. REVALUATION METHOD (I)
Cost of printing machine on 1 Jan 2000 = $15,000.
Market value on 31 Dec = $13,000.
Depreciation of printing machine for FY2000
= cost on 1 Jan 2000
– market value on 31 Dec 2000
= 15,000 – 13,000
= $2,000

67. REVALUATION METHOD (I)
Market value of printing machine on 1 Jan 2000 = $22,000.
Market value on 31 Dec = $19,000.
Depreciation of printing machine for FY2000
= Market value on 1 Jan 2000
– Market value on 31 Dec 2000
= 22,000 – 19,000
= $3,000

68. REVALUATION METHOD (I)
Complete the missing items:
Mach Cost or value Market value Depreciation
on on for FY2000 X Y Z
$6, $4,800
$1,200
$3, $2,500
$700
$5, $4,000
$1,600

69. REVALUATION METHOD (I)
Complete the missing items:
Mach Cost or value Market value Depreciation
on on for FY2000 X Y Z
$9, $6,200
$2,800
$6, $4,500
$1,800
$7, $5,500
$2,000

70. REVALUATION METHOD (II)
This method is normally used for loose tools where it is
difficult to estimate the rate of depreciation.
The value of the asset may be inflated by new purchases
and this has to be taken into account when calculating
depreciation.
Depreciation expense
= Value of asset
at the beginning
- Value of asset
at the end
+ Any new
purchases

71. REVALUATION METHOD (II)
On 1 Jan 2000 loose tools in the workshop were valued at
$2,000. During the year, tools worth $1,000 were bought.
On 31 Dec 2000, the estimated market value of the tools was
$2,600.
Depreciation expense
= Value of tools
on 1 Jan 2000
- Value of tools
on 31 Dec 2000
+ New purchases
= 2,000
- 2,600
+ 1,000
= $400

72. REVALUATION METHOD (II)
On 1 Jan 2000 loose tools in the workshop were valued at
$3,500. During the year, tools worth $1,500 were bought.
On 31 Dec 2000, the estimated market value of the tools was
$3,000.
Depreciation expense
= Value of tools
on 1 Jan 2000
- Value of tools
on 31 Dec 2000
+ New purchases
= 3,500
- 3,000
+ 1,500
= $2,000

73. DEPRECIATION IN THE BOOKS
RECORDING
DEPRECIATION IN THE BOOKS
- Provision for depreciation method
Example:
An office equipment was bought for $8,000 on 1 Jan 1999.
It is depreciated on the revaluation method. The market
values of the office equipment are shown below.
Show the records on your books for 2 years.
Market value as at $6,800
Market value as at $5,800

74. REVALUATION METHOD
Yr 1
Depreciation = cost on Market value on
= $8,000 - $6,800 = $1,200
Yr 2
Depreciation
= Market value on Market value on
= $6, $5,800 = $1,000

75. Office equipment 1999 Jan 1 Bank $8,000 1999 Dec 31 Bal. c/d $8,000
2000
Jan 1 Bal. b/d $8,000
2000
Dec 31 Bal.c/d $8,000
2001
Jan 1 Bal. b/d $8,000
B/S

76. Provision for depreciation - office equipment
1999
Dec 31 Prov. for dep $1,200
1999
Dec 31 P&L a/c $1,200
2000
Dec 31 Prov.for dep $1,000
2000
Dec 31 P&L a/c $1,000
Provision for depreciation - office equipment
P&L
1999
Dec 31 Bal. c/d $1,200
1999
Dec 31 Depreciation $1,200
2000
Dec 31 Bal. c/d $2,200
2000
Jan 1 Bal. b/d $1,200
Dec31 Depreciation ,000
$2,200
$2,200
2001
Jan 1 Bal. b/d $2,200
B/S

77. P & L a/c for year ended 31 Dec 2000
1999
Dec 31 Depreciation $1,200
P & L a/c for year ended 31 Dec 2000
2000
Dec 31 Depreciation $1,000
Dep

78. Fixed asset Office equipment $8,000 Less Prov. for dep. 1,200 $6,800
Balance Sheet as at 31 Dec 1999
Fixed asset
Office equipment $8,000
Less Prov. for dep , $6,800
Balance Sheet as at 31 Dec 2000
Fixed asset
Office equipment $8,000
Less Prov. For dep. 2, $5,800
Dep
O/E

79. IMPORTANT FEATURES: Fixed asset account shows original cost of asset.
Provision for Depreciation account shows
accumulated depreciation of fixed asset.
Book value of fixed asset (in Balance Sheet)
is original cost less Provision for Depreciation.

80. COMPARE THE 3 METHODS OF DEPRECIATION
Depreciation amount per successive year
Depreciation mtds
Constant
Decrease
Increase
Straight Line
Reducing Balance
Revaluation * X X
X X X
*Depreciation can either be constant, decrease or increase with every
successive year depending on the valuation of the fixed asset at the
end of the accounting period.

81. HOMEWORK
Textbook Betsy Li p318 Q6.
GCE ‘O’ Level Principles of Accounts
June 1997 Q3(b) & (c).

82. THE END