Definition: Depreciation is simply the protrating of machine consumption over its useful life.

Following are the methods of calculating depreciation:

Straight line method:

This method assumes that the loss of value of machine is directly proportional to its age i.e. value of the machine decreases from the purchase cost to ultimate salvage or scrap value at uniform rate.

Formula: annual Depreciation amount (D) = R.( P-S )

where $R = \frac{1}{N}$

$D= \frac{P-S}{N}$

P=Purchase cost

S=Salvage/Scrap cost

N=no. of years

R=Depreciation rate

Constant percentage method or declining balance method:

In this method the machine is assumed to loss value annually at constant percentage of its value.

Formula: $R = 1 –\frac{S}{C}^{1/N}$

C=Original cost

Sinking Fund Method:

In this method the depreciation is assumed to be annual sinking fund plus the interest of accumulating sinking fund till that year.

Formula:

Annual sinking fund = ${C-S }\times[\frac{i}{1-i}N -1 ]$

Where, i=rate of interest