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Depreciation Definition, Types And Causes

Depreciation

Depreciation is taken from the Latin word Depretium. De Means Decrease and premium mean price. Thus the meaning of Depreciation is decreased in princes. The reduction value of equipment and building is known as Depreciation.

Depreciation

Normally the power plant has age is 50 to 60 years. after the useful life, we need to maintain or change the machine or equipment of the power plant.

Thus to change the machine or equipment we have to save the money, this is the amount which is saved every year known as the Depreciation charge.

Types of Depreciation Method

1. Straight-line method

The straight-line method is a simple method to calculate depreciation. In this method, we calculate the amount based on the initial cost divided by the useful life of the equipment if the salvage value is zero.

If a salvage value is few amounts then we subtract the initial value to the salvage value and divide it by useful life.

Depreciation charge = initial value  - salvage value / Useful life

Straight-line method  example

suppose that the equipment cost is 10,000. Its salvage value is 1000 which is the resale value end of useful years. equipment useful life is 10 years.

straight-line method = 10,000 - 1000 / 10

= 9000/10

=900

2. Diminishing Method

In the Diminishing method, the depreciation charge is made every year at a fixed rate. the amount is decreased every next year because the cause of constantly used equipment efficiency reduces so we are reducing the value every year.

For example, the cost of the machine is 100000. In the diminishing method, the annual rate is 10 % so the amount is 10 % *100000. Thus the diminishing charge is 10000 so the value of the equipment is 90,000.

In the second year, the cost of equipment is 90,000 and the amount is 10 % * 90,000 thus the diminishing charge is 9,000. so the value of the equipment is 81,000.

Thus depreciation charge in the first year is maximum and the last year is a minimum.

3. Sinking Fund Method

In the sinking fund method, the amount is taken with the annual interest. The total installation charge of equipment with interest is equal to the replaced charge of equipment after a useful life is the depreciation charge.

Causes of Depreciation

  • Causes of depreciation equipment and building efficiency decrease by constant use. So we must change the equipment after this useful life. Thus we should collect the money for replacing the low-efficiency equipment.

  • Wear And Tear of Used constantly. When we have used any equipment continuously then his tires and equipment parts efficiency is decreased. so we have must change the part of the equipment or change the whole equipment.

  • Technology is changed every time so we have to change the old equipment as compared to new equipment because of the arrival of a new technology

  • Effect of weather and another element

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