What are types of Depreciation?

Answers were Sorted based on User's Feedback

Answer / m.s.s.v.sri kumar

Basing on the nature of the asset the depreciation will be
calculated.there are different methods of depreciations.
they are:
1) Straight line method,
2) Diminishing value method,
3) Sinking fund method,
4) Annuity method,
5) Depletion method. etc.

Is This Answer Correct ?    266 Yes 41 No

Answer / rajkumar.d

Depreciation it means decresing of value of the asset
1.annuity method
2.straight line method
3.demenishing value method
4.sinking fund method
5.depletion fund method
6.fixed asset method
7.depreciation fund method

Is This Answer Correct ?    114 Yes 26 No

Answer / anurag gautam

9 types of deprication
1 straight line method
2 production based methods.
(a) per unit and
(b) per hour
3 reducing balance method
4 repair provision method
5 annuity method
6 sinking fund method
7 sum of digit method
8 revaluation method
9 endowmend policy method (insurance policy method)

Is This Answer Correct ?    67 Yes 26 No

Answer / sudhaman

1.Straight Line Method.
2.Written Down Value Method.
3.Annuity Method.
4.Insurance Policty Method.
5.Depreciation Fund Method.
6.Revaluation Method.

Is This Answer Correct ?    52 Yes 18 No

Answer / tirumaleswara reddy

1. Straight line or Fixed Instalment method
2. Diminishing Balance or Reducing Instalment Method
3. Sum-of-the-years digits method
4. Annuity Method
5. Depreciation Fund or Sinking Fund Method
6. Insurance Policy Method
7. Machine Hour Rate Method
8. Revaluation Method
9. Depletion or Output Method

Is This Answer Correct ?    41 Yes 15 No

Answer / balaji mundhe

Methods of depreciation

There are several methods for calculating depreciation, generally based on either the passage of time or the level of activity (or use) of the asset.
[edit]Straight-line depreciation
Straight-line depreciation is the simplest and most-often-used technique, in which the company estimates the salvage value of the asset at the end of the period during which it will be used to generate revenues (useful life) and will expense a portion of original cost in equal increments over that period. The salvage value is an estimate of the value of the asset at the time it will be sold or disposed of; it may be zero or even negative. Salvage value is scrap value, by another name.
Straight-Line Method:

For example, a vehicle that depreciates over 5 years, is purchased at a cost of US$17,000, and will have a salvage value of US$2000, will depreciate at US$3,000 per year: ($17,000 - $2,000)/ 5 years = $3,000 annual straight-line depreciation expense. In other words, it is the depreciable cost of the asset divided by the number of years of its useful life.
This table illustrates the straight-line method of depreciation. Book value at the beginning of the first year of depreciation is the original cost of the asset. At any time book value equals original cost minus accumulated depreciation.
Book Value = Original Cost - Accumulated Depreciation
Book value at the end of year becomes book value at the beginning of next year. The asset is depreciated until the book value equals scrap value.
Book Value -
Beginning of Year Depreciation
Expense Accumulated
Depreciation Book Value -
End of Year
$17,000 (Original Cost) $3,000 $3,000 $14,000
$14,000 $3,000 $6,000 $11,000
$11,000 $3,000 $9,000 $8,000
$8,000 $3,000 $12,000 $5,000
$5,000 $3,000 $15,000 $2,000 (Scrap Value)
If the vehicle were to be sold and the sales price exceeded the depreciated value (net book value) then the excess would be considered a gain and subject to depreciation recapture. In addition, this gain above the depreciated value would be recognized as ordinary income by the tax office. If the sales price is ever less than the book value, the resulting capital loss is tax deductible. If the sale price were ever more than the original book value, then the gain above the original book value is recognized as a capital gain.
If a company chooses to depreciate an asset at a different rate from that used by the tax office then this generates a timing difference in the income statement due to the difference (at a point in time) between the taxation department's and company's view of the profit.
[edit]Declining-Balance Method
Depreciation methods that provide for a higher depreciation charge in the first year of an asset's life and gradually decreasing charges in subsequent years are called accelerated depreciation methods. This may be a more realistic reflection of an asset's actual expected benefit from the use of the asset: many assets are most useful when they are new. One popular accelerated method is the declining-balance method. Under this method the Book Value is multiplied by a fixed rate.
Annual Depreciation = Depreciation Rate * Book Value at Beginning of Year
The most common rate used is double the straight-line rate. For this reason, this technique is referred to as the double-declining-balance method. To illustrate, suppose a business has an asset with $1,000 Original Cost, $100 Salvage Value, and 5 years useful life. First, calculate straight-line depreciation rate. Since the asset has 5 years useful life, the straight-line depreciation rate equals (100% / 5) 20% per year. With double-declining-balance method, as the name suggests, double that rate, or 40% depreciation rate is used.
The table below illustrates the double-declining-balance method of depreciation. Book Value at the beginning of the first year of depreciation is the Original Cost of the asset. At any time Book Value equals Original Cost minus Accumulated Depreciation.
Book Value = Original Cost - Accumulated Depreciation
Book Value at the end of year becomes Book Value at the beginning of next year. The asset is depreciated until the Book Value equals Salvage Value, or Scrap Value.
Book Value -
Beginning of Year Depreciation
Rate Depreciation
Expense Accumulated
Depreciation Book Value -
End of Year
$1,000 (Original Cost) 40% $400 $400 $600
$600 40% $240 $640 $360
$360 40% $144 $784 $216
$216 40% $86.40 $870.40 $129.60
$129.60 $129.60 - $100 $29.60 $900 $100 (Scrap Value)
The Salvage Value is not considered in determining the annual depreciation, but the Book Value of the asset being depreciated is never brought below its Salvage Value, regardless of the method used. The process continues until the Salvage Value, or the end of the asset's useful life, is reached. In the last year of depreciation a subtraction might be needed in order to prevent Book Value from falling below estimated Scrap Value.
Since declining-balance depreciation doesn't always depreciate an asset fully by its end of life, some methods also compute a straight-line depreciation each year, and apply the greater of the two. This has the effect of converting from declining-balance depreciation to straight-line depreciation at a midpoint in the asset's life.
[edit]Activity depreciation
Activity depreciation methods are not based on time, but on a level of activity. This could be miles driven for a vehicle, or a cycle count for a machine. When the asset is acquired, its life is estimated in terms of this level of activity. Assume the vehicle above is estimated to go 50,000 miles in its lifetime. The per-mile depreciation rate is calculated as: ($17,000 cost - $2,000 salvage) / 50,000 miles = $0.30 per mile. Each year, the depreciation expense is then calculated by multiplying the rate by the actual activity level.
[edit]Sum-of-Years' Digits Method
Sum-of-Years' Digits is a depreciation method that results in a more accelerated write-off than straight line, but less than declining-balance method. Under this method annual depreciation is determined by multiplying the Depreciable Cost by a schedule of fractions.
Depreciable Cost = Original Cost - Salvage Value
Book Value = Original Cost - Accumulated Depreciation
Example: If an asset has Original Cost $1000, a useful life of 5 years and a Salvage Value of $100, compute its depreciation schedule.
First, determine Years' digits. Since the asset has useful life of 5 years, the Years' digits are: 5, 4, 3, 2, and 1.
Next, calculate the sum of the digits. 5+4+3+2+1=15
Depreciation rates are as follows:
5/15 for the 1st year, 4/15 for the 2nd year, 3/15 for the 3rd year, 2/15 for the 4th year, and 1/15 for the 5th year.
Book Value -
Beginning of Year Total
Cost Depreciation
Rate Depreciation
Expense Accumulated
Depreciation Book Value -
End of Year
$1,000 (Original Cost) $900 5/15 $300 ($900 * 5/15) $300 $700
$700 $900 4/15 $240 ($900 * 4/15) $540 $460
$460 $900 3/15 $180 ($900 * 3/15) $720 $280
$280 $900 2/15 $120 ($900 * 2/15) $840 $160
$160 $900 1/15 $60 ($900 * 1/15) $900 $100 (Scrap Value)
[edit]Units-of-Production Depreciation Method
Under the Units-of-Production method, useful life of the asset is expressed in terms of the total number of units expected to be produced. Annual depreciation is computed in three steps.

First, a Depreciable Cost is computed.
Depreciable Cost = Original Cost - Salvage Value.
Second, Depreciation per Unit is computed. Depreciation charge per unit is computed by dividing Depreciable Cost by Total Units, expected to be produced during the useful life of the asset.
Depreciation per Unit = Depreciable Cost / Total Units of production
Third, annual depreciation, or Depreciation Expense, by another name, is computed. Depreciation Expense equals Depreciation per Unit multiplied by the number of units produced during the year.
Depreciation Expense = Depreciation per Unit * Units produced during the Year.
Book Value, as always, is calculated by subtracting Accumulated Depreciation from the Original Cost.
Book Value = Original Cost - Accumulated Depreciation
Suppose, an asset has Original Cost $70,000, Salvage Value $10,000, and is expected to produce 6,000 units.
Depreciable Cost = ($70,000-$10,000) $60,000
Depreciation per Unit = ($60,000 / 6,000) = $10
The table below illustrates the Units-of-Production depreciation schedule of the asset.
Book Value -
Beginning of Year Units of
Production Depreciation
Cost per Unit Depreciation
Expense Accumulated
Depreciation Book Value -
End of Year
$70,000 (Original Cost) 1,000 $10 $10,000 $10,000 $60,000
$60,000 1,100 $10 $11,000 $21,000 $49,000
$49,000 1,200 $10 $12,000 $33,000 $37,000
$37,000 1,300 $10 $13,000 $46,000 $24,000
$24,000 1,400 $10 $14,000 $60,000 $10,000 (Scrap Value)
Depreciation stops when Book Value is equal to the Scrap Value of the asset. In the end the sum of Accumulated Depreciation and Scrap Value equals to the Original Cost.
[edit]Units of time depreciation
Units of Time Depreciation is similar to units of production, and is used for depreciation equipment used in mine or natural resource exploration, or cases where the amount the asset is used is not linear year to year.
A simple example can be given for construction companies, where some equipment is used only for some specific purpose. Depending on the number of projects, the equipment will be used and depreciation charged accordingly.
[edit]Group Depreciation Method
Group Depreciation method is used for depreciating multiple-asset accounts using straight-line-depreciation method. Assets must be similar in nature and have approximately the same useful lives.
Asset Historical
Cost Salvage
Value Depreciable
Cost Life Depreciation
Per Year
Computers $5,500 $500 $5,000 5 $1,000
[edit]Composite Depreciation Method
The composite method is applied to a collection of assets that are not similar, and have different service lives. For example, computers and printers are not similar, but both are part of the office equipment. Depreciation on all assets is determined by using the straight-line-depreciation method.
Asset Historical
Cost Salvage
Value Depreciable
Cost Life Depreciation
Per Year
Computers $5,500 $500 $5,000 5 $1,000
Printers $1,000 $100 $ 900 3 $ 300
Total $ 6,500 $600 $5,900 4.5 $1,300
Composite life equals the total Depreciable Cost divided by the total Depreciation Per Year. $5,900 / $1,300 = 4.5 years.
Composite Depreciation Rate equals Depreciation Per Year divided by total Historical Cost. $1,300 / $6,500 = 0.20 = 20%
Depreciation Expense equals the composite Depreciation rate times the balance in the asset account. (0.20 * $6,500) $1,300. Debit Depreciation Expense and credit Accumulated Depreciation.
When an asset is sold, debit Cash for the amount received and credit the asset account for its original cost. Debit the difference between the two to Accumulated Depreciation. Under the Composite method no gain or loss is recognized on the sale of an asset.
To calculate Composite Depreciation Rate, divide Depreciation Per Year by total Historical Cost. To calculate Depreciation Expense, multiply the result by the same total Historical Cost. The result, not surprisingly, will equal to the total Depreciation Per Year again.
Common sense requires Depreciation Expense to be equal to total Depreciation Per Year, without first dividing and then multiplying total Depreciation Per Year by the same number. Creators of accounting rules sometimes are very creative, as was noted on the discussion forum of Accounting Coach at [1]

Is This Answer Correct ?    36 Yes 14 No

Answer / vk

There are two types of depreciation

Physical Depreciation, which represents the accumulated
loss in market value caused by physical wear and tear since
the date the building was completed.

Functional Depreciation, which describes the loss of value
caused by outmoded or inadequate design

Is This Answer Correct ?    88 Yes 77 No

Answer / rahul

there are two types of depreciation straight line method
and write down value method

Is This Answer Correct ?    63 Yes 53 No

Answer / zakiur rahman

The depreciation is of two types: book and tax

Book depreciation is done for the use of the company to
report its financial status to its stockholders and other
related people.

Tax depreciation is done for the purpose of calculating
taxes. Both methods are based on the principle of matching
concept, which requires that a fraction of the cost of the
asset in an accounting period, commensurate with its use in
that period, is charged as an expense.

Is This Answer Correct ?    6 Yes 0 No

Answer / indu reddy

fixed installment method.
diminishing balance method.
annuity method.
depriciation fund method.

Is This Answer Correct ?    2 Yes 0 No

Post New Answer

More Finance Interview Questions

DOW stock exchange belong to which country?

4 Answers   Infosys,

why did you chose this specialization( finane,HR)

3 Answers   Capital IQ,

Banking interview questions.......

2 Answers   Accenture, DELL, TCS, Brigade, Karvy, Punjab National Bank, Banking,

i am doing mba finance.what r the topics i should be familiar with as to become a financial manager

2 Answers   Karvy,

What do i do for a living

1 Answers  

what are the roles of cost information in managerial decision making

1 Answers   TouchStone,

What are Funds Flow Statements?

34 Answers  

What is Hedging?

8 Answers  

how to delete the company in the tally version(9.0)

5 Answers  

What is Risk?

15 Answers  

what is the function of bangalore stock exchange?

2 Answers  

hai friends .i applied for icici po callfor in july2010.i have been sortlisted for icici bank po and they fix the appoinment on july 31.so i don't know whether it is an interview or test or gd.can any body attend it already .please tell about it and how to prepare.my email id is anbuselvi16@gmail.com

0 Answers  

  • Business Administration (500)
  • Marketing Sales (1010)
  • Finance (1086)
  • Human Resources (735)
  • Personnel Management (68)
  • Hotel Management (23)
  • Industrial Management (76)
  • Infrastructure Management (14)
  • IT Management (95)
  • Supply Chain Management (16)
  • Operations Management (6)
  • Funding (77)
  • Non Technical (72)
  • Business Management AllOther (492)