The Indian Institute of Banking and Finance holds an exam to fill the position of Junior Associate of the Indian Institute of Bankers, which is currently vacant. The Indian Institute of Banking and Finance holds an exam Junior Associate of the Indian Institute of Bankers, which is currently vacant. The exam is held twice a year in two cycles, i.e., in May and November. In this blog, we will have a look at Depreciation and its types in detail which is important for JAIIB.
What is Depreciation?
The word ‘depreciation’ has been derived from the Latin word ‘Depritium’, which
means ‘reduction or devaluation’, i.e., reduction in the value/price of an asset. The
monetary value of an asset decreases over time due to use, wear, and tear, or
obsolescence. This decrease is measured as Depreciation. For eg., a Vehicle bought
today will not have the same value after a few years. Its price will decrease due to its
use or wear and tear. This reduction in value is termed depreciation. In this blog, learn, we will learn about Depreciation and its types for JAIIB.
Different companies may use different types of depreciation methods, especially
those in different industries; that’s why there are many depreciation methods.
Depreciation and Its Types | Free Ebook
Click on the link below to download the free Depreciation and its types e-book
How to Download the Free e-book PDF?
- Click on the below-given download link. You will be taken to Oliveboard’s FREE Ebooks Page. Alternately, you can download the Oliveboard Android App to access these on your smartphone.
- Register/Login on to the Free E-Books Page of Oliveboard (It is 100% free, You just enter your valid email ID and a password to be able to download the Free e-book).
- Once logged in, you’ll see the message, “Please click here to download the Free Ebook“. Click on the message to download that particular ebook.
Types of Depreciation
The five types of depreciation methods that are commonly seen include:
- Units of production
- Some of the years’ digits
- Declining balance
- Double-declining balance
Straight-line depreciation method
The straight-line depreciation method is the depreciation method that spread the cost of
assets evenly over the useful life of the assets. The depreciation expense of the fixed
assets each year, from the first year to the last year of the fixed assets, will be the
The formula of Straight-Line Depreciation
Annual Depreciation = (Original cost — Estimated scrap value)/Estimated useful life
Units of Production Depreciation Method
Units of production depreciation is the depreciation method that uses the number of
units produced as a basis for calculation. In units of production depreciation, the
more that the fixed is used in the period (resulting in more units produced), the more
depreciation expense will be charged.
The formula of Units of Production Depreciation
Annual Depreciation=Depreciable Value × (Units produced during the year/
Estimated total production)
Sum of the years’ digits depreciation method
Sum of years digits (SYD) is an accelerated method for calculating an asset’s
depreciation. A method known as accelerated depreciation allows more deductions in
the earlier years of the asset & gradually decreases in the later years. The method
assumes that the asset’s productivity decreases with the passage of time.
Sum of Years Digit is best suited for assets that may become obsolete very soon due
to technological advancements, such as computers, automobiles, etc.
How does the method of Sum of years digit works?
Assuming an asset is expected to last for five years, adding together the digits for
each year results in 15; so, if the asset was expected to last five years, adding 5 + 4 +
3 + 2 + 1 would generate 15. Each digit is then divided by this sum to determine the
depreciation rate each year, starting with the highest number in year 1.
Declining Balance Depreciation Method
Declining balance depreciation is the depreciation method that reduces the net
book value of the fixed assets by a fixed percentage rate. This method charges the
depreciation amount of fixed assets higher in the early year. The depreciation
amount will keep reducing or declining as time passes. It does this on the basis that
when a fixed asset is new, it gives more benefits to the company or is more
productive than when it is older.
The formula of declining balance depreciation
Declining Balance Method = (Net Book Value – Residual Value) * Rate of Depreciation
*Net Book Value = Cost – Accumulated Depreciation
Double decline balance depreciation method
Double decline balance depreciation is similar to the declining balance depreciation method. It reduces the net book value of the fixed assets by a fixed percentage rate. However, the fixed percentage rate or the depreciation rate used in this method is double the straight-line depreciation rate. The double-declining balance depreciation method also charges the depreciation amount of the fixed assets higher in the early year.
The formula of Double Declining Balance Depreciation
Double declining balance depreciation = Net book value x depreciation rate
*Net Book Value = Cost – Accumulated Depreciation
Depreciation and its types for JAIIB – FAQs
Click on the given download link. Register/login in the Oliveboard site and click on ‘Please click here to download the Free Ebook‘ message to download the e-book
The declining balance depreciation method works on the basis that when a fixed asset is new it gives more benefits to the company or is more productive than when it is older.
The formula for Straight-line depreciation method is: Annual Depreciation = (Original cost− Estimated scrap value)/Estimated useful life
I have been creating exam related content for 3 years now. Having appeared for UPSC, SSC, Railway and Banking Exams myself, I understand and create relevant content, important from exams point of view. I am currently creating content for SSC, Railway, J&K and Law entrance exams. During my free time, I love bingewatching shows or read novels.