Concept:
1. Straight-line method:
This assumes that the loss in the value of the property is the same every year and at the end of its useful life it is equal to its scrap value.
\({\rm{Annual\;Depreciation}} = \frac{{{\rm{Purchasing\;cost}} - {\rm{salvage\;value}}}}{{{\rm{life\;of\;machine}}}}\)
2. Constant percentage method:
This assumes that the property loses its value by a constant percentage of its value at the beginning of each year. (n = life of machine)
\(\rm Annual{\rm{ }}\;Depriciation = 1 - {\left( {\frac{{Scrap{\rm{ \;}}Value}}{{Original{\rm{ }}\;Cost}}} \right)^{\frac{1}{n}}}\)
Calculation:
Given:
Initial cost (IC) or purchasing Cost = Rs. 10,00,000
Scrap Value (SV) = Rs. 50,000
Life of Machine, n = 10 Years
Total depreciation for 10 years = IC - SV
= 10,00,000 - 50,000
= Rs. 9,50,000
Depreciation per year = \(\frac{{{\rm{Total\;Depreciation}}}}{{{\rm{Deign\;life}}}}\)
= \(\frac{{{\rm{\;}}9,50,000}}{10}\)
= Rs. 95,000
Total depreciation up to 7th year,
= Depreciation per year × no. of year
= 95,000 × 7
= Rs. 6,65,000
Book Value = Initial Cost - Total depreciation
= 10,00,000 - 6,65,000
= Rs. 3,35,000
