Q. What is depreciation?
Solution:
Depreciation is derived from the Latin word “depretium” which means a decrease in the value of fixed assets due to wear & tear, the passage of time, and obsolescence.
Example
The cost of the machine is Rs. 1,00,000 and its estimated life is 5 years.
To calculate the annual depreciation, you would divide the initial cost of the machine (Rs. 1,00,000) by its estimated life (5 years).
This gives you an annual depreciation expense – 1,00,000/5 = 20,000.
Year 1
At the end of the first year, the machine value is – (1,00,000 – 20,000) = 80,000
Year 2
In the second year, the machine value is – (80,000 – 20,000) = 60,000.
Year 3
In the third year, the machine value is – (60,000 – 20,000) = 40,000.
Year 4
In the second year, the machine value is – (40,000 – 20,000) = 20,000
Year 5
In the last year, the machine value is – (20,000 – 20,000) = 0.
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