Depreciation

Topic

Depreciation

Area

Bookkeeping & Journal

Explanation

Depreciation

Depreciation is the systematic allocation of the cost of a tangible fixed asset over its useful life.

Methods

1. Straight-Line Method (SLM)

Annual Depreciation $= \frac{(Cost - Residual \text{ Value})}{Useful \text{ Life}}$

Example: Cost = NPR 100,000; Residual = 10,000; Life = 9 years. Annual Depreciation $= (100,000 - 10,000) / 9 = 10,000$. Thus, NPR 10,000/year.

2. Declining Balance / Written Down Value (WDV) Method

Depreciation $= Book \text{ Value at beginning of year} \times Depreciation \text{ Rate} (%)$

Example: Book Value = NPR 100,000; Rate = 20%

Year 1: Depreciation $= 100,000 \times 20% = 20,000$; Book Value $= 100,000 - 20,000 = 80,000$.
Year 2: Depreciation $= 80,000 \times 20% = 16,000$; Book Value $= 80,000 - 16,000 = 64,000$.

Why Depreciate?

Matching Principle: Matches the cost of the asset to the revenue it generates.
Asset Valuation: Reflects a more accurate asset value on the balance sheet.
Tax Benefit: Reduces taxable income, leading to lower tax liabilities.