Depreciation in Accounting: Definition, Factors, Methods and Examples

Depreciation in Accounting: Definition, Factors, Methods and Examples – So what is depreciation ?? Understanding Depreciation is an allocation made systematically to shrink or reduce the amount of an asset over its useful life. These fixed assets are the company’s assets to support operational activities. Every year, the depreciation expense of the fixed assets arises as a user in the company’s operations.

In general, the application of depreciation or depreciation of fixed assets in the company’s finances can affect its financial statements and also changes in corporate income tax. Depreciation is often seen as a loss in the calculation of value, but for an accountant who understands financial statements can view depreciation as a tool for cost allocation.

Definition of Depreciation

Depreciation is a consequence of the use of fixed assets. Where the fixed assets will tend to experience a decline in function. The definition of depreciation according to general reasoning is a reserve that will be allocated to buy new assets to replace the old assets that are not productive. While according to accounting, depreciation is the allocation of the acquisition cost of fixed assets into the cost of production, or operational costs caused by the use of these fixed assets.

Fixed assets will experience depreciation from one period to the next, so the value of the use of fixed assets will continue to decrease from one period to the next, except land. For example, a machine that was purchased for the company’s operating effectiveness for 12,000,000 and after the next 6 years the value of the machine has depreciated to Rp. 7,000,000.

In a certain period if it has been used or utilized, the value of fixed assets will decrease. Fixed assets whose value will not decrease, even the value tends to increase or the higher is the land. Over time, the value of a piece of land will increase or increase.

Depreciation of property, plant and equipment occurs due to reduced use value of fixed assets caused by the use of these fixed assets. Depreciation is also known as depreciation, which is the allocation of fixed assets due to a decrease in value of these fixed assets. There are several methods that can be used to determine the amount of depreciation or depreciation, including the straight-line method, the number of years method, the multiple-declining method, the unit of work hours method and the unit of production yield method.

Before discussing more about the method of depreciation of fixed assets, you should first understand the following terms:

  1. Cost (goods prices + accompanying costs)
  2. Book price of fixed assets (acquisition cost – accumulated depreciation of fixed assets)
  3. Residual value is also called residual value which is the estimated value of fixed assets after use according to their economic life.
  4. Economic life is the time limit for using goods or the estimated age of goods.

Some of the terms above will make it easier to understand the method of preparing fixed assets. The following is an explanation and discussion of several types of fixed asset depreciation methods

Also Read:   “Fixed Assets” Definition & (Characteristics – Traits – Examples)

Definition of Depreciation According to Experts

To better understand what depreciation means, we can refer to the opinions of some experts on the definition of depreciation. Now the following is the definition of depreciation or depreciation according to experts:

  • According to Sofyan Harahap
    The definition of depreciation is the allocation of the cost of fixed assets during the period of use or we can also call costs charged to production due to the use of these fixed assets in the production process.
  • According to Kleso, Weygant and Warfield
    The definition of depreciation is the accounting process to allocate the cost of tangible assets to costs systematically and nationally over the period expected to utilize the use of these assets.
  • According to Zaki Baridwan The
    definition of depreciation is a portion of the acquisition cost of fixed assets which is systematically allocated to be a part of the cost of the accounting period.
  • According to PSAK (Question on Financial Accounting Standards)
    According to PSAK No. 17 the meaning of depreciation is the allocation of the amount of an asset that can be depreciated over the estimated useful life. Depreciation for the accounting period is charged directly or indirectly to income.

Factors in Determining Depreciation Load

There are three factors that need to be considered in determining the depreciation expense for each period, according to Baridwan (2010: 307), namely:

  • Cost (cost)

Namely the money spent or debt incurred and other costs incurred in obtaining an asset and place it so that it can be used.

  • Residual value (residual)

The residual value of a depreciated asset is the amount received if the asset is sold, exchanged or other means when the asset can no longer be used, less the costs incurred when selling / exchanging it.

  • Estimated useful life (useful life)

The estimated useful life (useful life) of an asset is affected by the means of maintenance and the policies adopted in the preparation. This age estimate can be stated in terms of time period, unit of production or unit of work hours. In assessing the age (useful life) of assets, physical and functional causes of wear must be considered.

Also Read: “Production Sector” in Economy & (Expansion – Quality Improvement)

According to Nayla 

According to Nayla (2013: 41), shrinkage can occur in three fixed conditions namely:

  • Used for more than one year or one accounting period.
  • Used for the purposes of company operational activities, company production activities, and profit-taking activities of the company.
  • Can provide benefits or benefits for the company, but has a limited useful life or benefits.

According to Herry
Meanwhile, according to Hery (2014: 139), to obtain the exact amount of periodic depreciation expense, there are four factors that need to be considered:

  1. Value of assets (asset cost)
  2. Residual or residual value (residual value)
  3. Economic age (econimic life)
  4. Pattern of use (pattern of use)

Depreciation Method in Business Accounting

Within a company there are several commonly used depreciation methods. In accordance with the definition of depreciation above, which requires an accountant to use a rational and systematic method of depreciation.

For example in a case study example, your company wants to buy a new production machine for a specific purpose then it can be described as follows:

  • Cost of New Production Machines = Rp. 500 million
  • Benefit Estimated Time = 5 years
  • Estimated Residual Value = Rp 50 million
  • Productive Age = 30 thousand hours

From this description, there are several depreciation methods that you can use to calculate your company’s financial depreciation expense, including:

Also Read: “Acquisition” Definition & (Types – Benefits – Processes – Strengths – Weaknesses)

Straight-Line Method “Straight-Line Method”

This method is also called the Straight-Line Method and is the method most often used to calculate depreciation expense. This method focuses on depreciation as a function of time and not of usage function.

The calculation formula is as follows:

  1. Depreciation Cost = (Asset Cost-Residual Value): (Asset Value)
  2. Depreciation expense = (Rp. 500 million – Rp. 50 million): 5 = Rp. 90 million

However, the use of this method is considered less realistic because the use of the same assets every year.

Decreasing Charge Method

This method is an accelerated depreciation method which provides higher depreciation costs in the initial year and lower load in subsequent periods. The main focus on this method is the expense of more depreciation in the initial year because the assets decreased in that year.

This method is divided into two parts, namely:

  • Method of Number of Years
    The calculation of depreciation uses fractions with a numerator of the year number (5 + 4 + 3 + 2 + 1 = 15) and the number of years becomes the denominator. In this method the numerator decreases year after year and the denominator remains constant (5/15, 4/15, 3/15, 2/15, and 1/15), with the following illustrations:
  • Decreased Balance Method The
    declining balance method uses the depreciation expense “in percentage” in the form of multiples of the straight-line method. For example the double declining balance rate for a 10 year asset will be 20% “twice the straight line cost of 1/10 or 105”, following the illustration:

Also Read: “Economic Activity” Definition & (Purpose – Kinds – Examples)

Activity Method (Unit of Use or Production)

This method assumes depreciation as a function of productivity or use and not in terms of time passing. With the picture above, determining the age of production machine shrinkage has no particular problem because the use of relatively easy to measure.

Suppose the production machine is used 4,000 hours in the first year, then the depreciation expense can be calculated as follows:

Depreciation expense = [(IDR 500 million – IDR 50 million) x 4,000]: 30 thousand = IDR 60 million.

However, this method has limitations because it is not appropriate to use in depreciation situations based on time and not activity.

Special Depreciation Method

In terms of depreciation it has been explained that the aim is to find out the benefits of the company’s assets. However, in some cases, a company cannot choose one of the depreciation methods above because the assets involved have unique characteristics or require special application.

There are two specific methods that you can apply to this case, namely:

  • Group and combined methods, often used on assets that are quite homogeneous and have almost the same function.
  • Mixed and combination methods, applied in accordance with the wishes of the accountant.

Problems example

A truck was purchased by PT Bromo on January 1, 19 × 1, the purchase price of Rp. 12,000,000, the repair fee is Rp. 1,000,000 estimated residual value of Rp. 1,000,000, estimated useful life of 5 years, specify depreciation depreciation
costs = 13,000,000 – 1,000,000 / 5: 2,400,000

Depreciation Table 

Year The amount depreciates Tariff Depreciation fee Accumulated depreciation Book value

19 × 1

19 × 2

19 × 3

19 × 4

19 × 5

12,000,000

12,000,000

12,000,000

12,000,000

12,000,000

20%

20%

20%

20%

20%

2,400,000

2,400,000

2,400,000

2,400,000

2,400,000

2,400,000

4,800,000

7,200,000

9,600,000

12,000,000

10,600,000

8,200,000

5,800,000

3,400,000

1,000,000

Count 
a. depreciation rates
b. annual depreciation
c. book value after 5 years of an asset that is worth Rp. 10,000,000 purchased on January 5. After the end of the useful life for 10 years the remaining value of Rp. 2,000,000.

Answer:

depreciation tariff: 100% / estimated age
: 100% / 10: 10%

depreciation: (acquisition price – residual value) x depreciation tariff / year
: 10,000,000 – 2,000,000 x 0.1
: 800,000 / year

Book Value 

Depreciation for 5 years: 800,000 x 5 = Rp. 4,000,000
book value: acquisition cost – accumulated depreciation
: 10,000,000 – 4,000,000
: 6,000,000

Unit of Production Method 

Depreciation is calculated based on the unit of output or unit of production for example hours, kg
depreciation = depreciation of the unit x use of
depreciation = acquisition price – residual value x use of
estimated life (in units)

example   A truck was purchased by PT Bromo on January 1, 19 × 1, the purchase price of Rp. 12,000,000, the repair fee is Rp. 1,000,000 estimated residual value of Rp. 1,000,000, estimated useful life (100,000 km), determine depreciation eg 19 × 1 truck used 15,000 km, 19 × 2 30,000 km, 19 × 3 20,000 km, 19 × 4 25,000 km, 19 × 5 10,000 km

Depreciation cost of unity : 13,000,000 – 1,000,000 / 100,000: 120 

Year Unit of activity Depreciation / unit Depreciation fee Accumulated depreciation Book value

19 × 1

19 × 2

19 × 3

19 × 4

19 × 5

15,000

30,000

20,000

25,000

10,000

120

120

120

120

120

1,800,000

3,600,000

2,400,000

3,000,000

1,200,000

1,800,000

5,400,000

7,800,000

10,800,000

12,000,000

11,200,000

7,600,000

5,200,000

2,200,000

1,000,000

Example:

PT Elok buys a used car for Rp. 600,000 and spent Rp. 150,000 as the cost of repairs, how much depreciation and book value at the end of the second year if the car has a residual value of Rp. 150,000 and an estimated useful life of another 85,000 km, in the first year the car was used as far as 12,000 km and in the second year it took 14,000 km
depreciation perunit: 750,000 – 150,000 / 85,000 km
: Rp 7 / km
Depreciation in 1: 7 x 12,000: 84,000 in
2: 7 x 14,000: 98,000
accumulated depreciation: 84,000 + 98,000 = 182,000
book values ​​at the end of the second year: 750,000 – 182,000 = 568,000

Double Declining Method (Double Declining Method) 

In calculating depreciation with this method no residual value is recognized. Based on this method a straight-line depreciation tariff without a residual value multiplied by two is used to determine the depreciation of the double-run balance by multiplying the rate that has been multiplied by the book value of assets at the beginning of each
book period  at the beginning of the year x depreciation rates = depreciation fees depreciation
rates = 100% x 2

Thus the discussion about Depreciation in Accounting: Understanding, Factors, Methods and Examples  hopefully with this review can add insight and knowledge of you all, thank you very much for your visit.

 

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