Depreciation is loss in the value of property due to its use, life, wear, tear, decay and obsolescence.
Thus depreciation is the value of building or property decreases gradually up to the utility period due to depreciation.
This depreciation is an assessment of physical wear and tear of a building and is naturally dependent on its original condition, quality of maintenance and mode of use.
Methods of calculation of Depreciation:
- There are different methods of calculation of depreciation.
- Straight line method
- Quantity surveying method
- Constant percentage method
- Sinking fund method
Straight line method:
Straight line method in this method is assumed to lease value by constant amount every year and thus fixed amount of original cost is written off every year, so that at the end of the term when the asset is worn out, only scrap value remains.
Annual depreciation = ( Original cost – Scrap value ) / Life in year
D = ( C- S c ) / n
Quantity surveying method:
Quantity surveying method in the property studied in detail and extent of physical deterioration worked out in the endeavor to calculate depreciation.
Constant percentage method:
Constant percentage method is also called a declined balanced method and this method the property is assumed to lose value annually at constant percentage of the value.
P = 1- ( S c/C )^ ( 1/n )
P- Percentage rate of annual depreciation.
C- Original cost
S c- Scrap value
N- life of property in a year.
Sinking fund method:
Sinking fund method in depreciation assumed to be an annual sinking fund till that end.
An amount of Re 1/- per annum in ‘n’ year
= ( 1+ i ) ^n – 1 / i = (y)
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