Business activity: different methods of calculating depreciation

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Hello everyone and how are we doing today, much praises the week is finally over and we can all relax during the weekend.

Today on my blog we would be learning what depreciation is and how we can calculate it.

As an economics student it's always gives me great joy sharing my knowledge.

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For all those who are studying accounting or are into one business or another we must have this word very often, for as often as we hear it many of us do not know what it means or its implications.

Depreciation is a term used to explain the process whereby the usefulness of assets decrease overtime, this decrease may be due to factors such as wears and tears, passage of time, change Inmarket trend, obsolescence.

We are made to understand that nothing last forever and no matter how solid and asset is or appear to be they would come a time when this assets would be replaced due to lack in functionality.

The assets could be anything and it doesn't necessarily have to be a business item, I could be an asset such as your mobile phone or the cloths you put on.

Taking a look back in time we find out that the clothes we are putting on are different from those we wore in 2010 and the main reason for this is depreciation, those clothes though they were good at some point they are no more able to satisfy our present wants efficiently, this process is called Depreciation.

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In order of us as individuals to be able to have a ascertain when an asset would no longer be of relevance to us,we would need to apply some calculations to give a projected time frame so we know when before hand when the asset would become obsolete.

There is a popular way of calculating depreciation of assets and this is as follows.

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Types of Depreciation

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They are many ways which can be used to ascertain the rate in which an asset Depreciated or to know the current net value of the assets.

Example of this methods are.

1. Using fixed rate
2. Using changing rate
3. Amortisation

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This is a method of calculating Depreciation in which assume that all assets depletes at a fixed rate each year.

Meaning that the lose of value is the same all year round and it doesn't matter the current year in which the asset is going Through.

Hence a fixed rate of depletion is used to calculate the depreciation rate of an asset for the course of its useful years.

The rate of depreciation can be gotten as follows

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Depreciation calculation for t-shirt using purchase amount.

This method of calculating Depreciation is done when we assume that an asset would deprecate at a fixed percentage each year as against to the purchase price.

What this means is that if we buy a t-shirt for 10,000 we assume that each year the shirt for would depreciate by 25 as against the 10,000 it was bought for originally.

This would give us an estimate on how much we are to set aside each year so as to replace the shirt at the end of it's useful life

T shirt

Years	present value	25% Depreciation	net value
Year 1	10,000	2500	7500
Year 2	7,500	2500	5000
Year 3	5000	2500	2500
Year 4	2500	2599	0000

Using this method of calculating Depreciation we find out that it takes a shirt 4 years to out live it's useful life and within this 4 years it is advisable you set aside 2500 each year to replace the shirt after its useful life.

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Depreciation calculation using net present value

Unlike the calculation of depreciation by purchase amount this method of depreciation states that the value of an asset depreciation progressively based on the present value of the asset.

If an asset has Depreciated by 2500 as the case of the short above for the next year the calculation of Depreciation must would be leased by the net present value rather than the purchase price.

Example
A shoe was bought for 10,000 using the calculation based on net present value we will now ascertain the Depreciation.

shoes

Years	net present value	25% Depreciation	net value
Year 1	10,000	2500	7500
Year 2	7,500	1875	5625
Year 3	5625	1406 .25	4,218.75
Year 4	4,218.75	1055	3164

The method of Depreciation implies that all assets irrespective of Thier current nature always have value and as such they could keep being used.

Just like a shirt of 10 years ago can still be worn today, the only problem would be that it might be torn and out of fashion that doesn't mean that it can't serve the purpose.

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This method of Depreciation calculatuon states realises the fact that aassest do not Depreciate at an equal percentage each year and that some years Depreciate more than other years hence this method of Depreciation gives different rate of depreciation to each year.

The calculation for the rate depreciation for each year is are Progress and regressive

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progressive rate

This method of calculating depreciation states that for each year there the rate in which the asset Depreciate is more than previous years hence the each year has a higher interest rate than the previous year till the end of the assets useful life.

Example
A car was bought for 10,000 using the progressive rate calculation we will know calculate for the depreciation.
Asuuming the asset where to last was to Depreciate for 6%,8%,10%,12% par each year. before it would need to be changed.

car

Years	presnet value	% Depreciation	net value
Year 1	10,000	6% of 10,000 = 600	9400
Year 2	9,400	8% of 9,400= 752	8648
Year 3	8648	10% of 8648= 865	7783
Year 4	7783	12% of 7783 = 934	6849

Using the progressive Depreciation rate we find out that with each year the value of the said asset Depreciates more hence the useful lifes reduces faster.

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Regressive rate

The regressive rate of calculating Depreciation state that the rate in which am assets Depreciation reduces as time goes on hence the rate or Depreciation reduces as each year passes.

In essence the asset loses Alot of value in the first year as it is still new and less in the next year and less in the year that follows

Example
A mobile phone was bought for 10,000 using the regressive rate calculation we will now calculate for the depreciation.
The following regresisve rates are given
20%, 15%, 10%, 5%. For each corresponding year

a mobile phone

Years	presnet value	% Depreciation	net value
Year 1	10,000	20% of 10,000 = 2000	8000
Year 2	8000	15% of 8000= 1200	6800
Year 3	6800	10% of 6800= 680	6120
Year 4	6120	5% of 6120 = 306	5814

From the calculation we are able to discover that the depreciation rate though very high at the first year over time began to reduce in the sense that majority of the value has already been lost and in the next year what is lost would not be as much as that of the previous year.

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By understanding Depreciation it would enable us to make smarter decision both financially and emotionally, we learn that nothing last forever and even that car we are in a rush to buy would some day become out of trend.

So far they are two things that do not Depreciate land and crypto

This are two assets that over time due to scarcity would always increase in value,

Due to the finite available land we have on earth we often hear of disputes over lands and many more because this is an asset that do not Depreciate but rather appreciate over time.

The same with crypto, for most crypto that are deflatuoni in Supply we often find out that on the long run such crypto would always increase in value.

Take Bitcoin for example through Bitcoin halfing we are able to understand consistently the reward you receive for btc is getting smaller in amount , but this does not mean that the value is getting smaller.

In 2009 when Bitcoin came you could mine a thousand Bitcoin but today you could mine 10 Bitcoin.

But what we notice is that the 10 Bitcoin we get from mining is worth more than the 1000 we got in 2009.

Invest wisely that's my final parting words

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For every asset that we indivduals own we just be aware that as time is passing by this assets are deprecating, it doesn't matter how well we use this assets it's just the way it is.

By calculating for depreciation we can have an idea of how long such asset would last us before we are to change it, also by calculating Depreciation we should adopt a saving culture so when its time to replace such asset it won't be a problem.

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