There are various methods according to which depreciation can be calculated. The most commonly used methods are the fixed instalment and the diminishing amount methods.

The principles and processes for journalising depreciation is basically the same irrespective of the method you use to calculate depreciation. Some of the following methods are available:

• Fixed Instalment Method
• Reducing or Diminishing Balance Method
• Production Method
• Assets purchased for Less than a Prescribed Amount.

According to the fixed instalment method, or cost price method, a fixed amount of depreciation is written off annually.

- The amount of depreciation will be same every year. It is calculated according to the life span of a fixed asset.

- If it is estimated that a fixed asset’s life span is five years, the cost price of the asset will be written off over a period of five years. The depreciation can be calculated by dividing the cost price by 5 years, or 20% per annum.

The following worksheet is used to illustrate how to calculate the depreciation on a delivery van:

The calculation is as follows:

• The depreciation is calculated on the cost price, less the trade in or scrap value at the end of the life span of the delivery van.
• For the first year, calculate the depreciation on the cost price of 15500 less the trade in or scrap value of 500. The depreciation will therefore be calculated as 20% of 15000, which is 3000 per annum.
• This amount of 3000 will be depreciated in five equal instalments for the years during the life span of the delivery van.
• After the end of the fifth year, the book value will be 500, which is the trade in or scrap value of the vehicle. Over the life span of the vehicle, the depreciation will total to 15000.

According to the diminishing method, most of the fixed asset’s value will diminish, or be written off in the first year, and a lesser amount in the second year, and even lesser amounts in the successive years.

If compared to the fixed instalment or cost price method, the amount of depreciation will differ from year to year and will decrease from year to year.

- The book value reduces or diminishes rapidly up to 50% in the first year and a lesser percentage in the second and successive years. This is also why some people refer to it as the accelerated method.

There are two basic formulas that may be used to calculate depreciation when the diminishing balance method is used. These methods are: -

• Fixed percentage on the diminishing (reducing) balance method.
• The Sum-of-the-digits method.

A fixed percentage of the book value is used to calculate the depreciation, which must be written off each year.

- If the life span of an asset is for instance, five years, and is normally calculated as 20%, the percentage needs to be doubled to 40% in this case. The fixed percentage must be used to calculate the percentage on the reduced (diminished) balance at the beginning of the applicable year.

The following worksheet is used to calculate the depreciation on a delivery van:

Note the following:

• The depreciation is calculated on the full cost price. The trade in value or scrap value at the end of the life span of the delivery van is not taken into account for calculating depreciation according to this method.
• This method will always have a minimal book value at the end of the last year in the life span of the fixed asset, which is the scrap value.
• For the first year, we will calculate depreciation on the cost price of 15500, including the trade in or scrap value of 500.
• The depreciation will be calculated as 40% of 15500, which is 6200 per annum.
• For the next year, the depreciation will be calculated as 40% on the reduced balance, which is the book value of 9300.
• The depreciation will be calculated as 40% on the book value for each of the successive years for the life span of the delivery van.
• After the end of the fifth year, the book value will be 1205, which is more than the trade in or scrap value of the vehicle.
• Over the life span of the vehicle the depreciation will total to 14295.

If this method is used, the total of the number of years of the life span of the fixed asset is divided by the cost price less, the expected trade in or scrap value of the fixed asset.

• In the first year, the amount is then multiplied by the highest number of years (last year) of the life span of the fixed asset.
• For the second year, the second last year number of the life span of the asset is used, and so on.
• In the last year, the first year’s number is used.

The following worksheet is used to calculate the depreciation on a delivery van:

1. The sum of the years must be added up. For example if the fixed asset is depreciated over a life span of five years, the digits for each of the number of years must be added up.
   For five years we will add up 1+2+3+4+5 = 15.
2. The number 15 is then divided into the cost price of the asset less the trade in or scrap value of the asset.
3. For example, our delivery van is 15500, less the trade in value of 500.
4. 15000 divided by 15 = 1000. This is the factor, which we will use through the entire life span of the delivery van.
   1. In year 1 - Use 1000 x 5. This is the very first year in the delivery van’s life span.
   2. In year 2 - Use 1000 x 4. This is the second year in the delivery van’s life span.
   3. In year 3 - Use 1000 x 3. This is the third year in the delivery van’s life span.
   4. In year 4 - Use 1000 x 2. This is the second last year in the delivery van’s life span.
   5. In year 5 - Use 1000 x 1. This is the last year in the delivery van’s life span.

According to this method, the depreciation is directly related to the use of the asset in the business. Some of the factors used to calculate the life span are the following:

• The number of units produced.
• The number of hours spent.
• The distance travelled.

For example, if a printer is purchased for 15500, and has a trade-in or scrap value of 500, and it is expected to print 10000 books, the depreciation will be calculated as follows:

• Price of printer (less the trade-in or scrap value) 15500 – 500 = 15000
• Number of units to be produced during the life span of the printer = 10000
• The depreciation to be written off, will therefore be = 1.50 per unit (or book).

At the end of the financial year or accounting period, the number of units produced will be multiplied with the factor or 1.50 per unit. For example, if 3000 (units) books were produced during the financial year, the depreciation would be 4500.

Amounts of less fixed assets purchased for less than 1000 may be written off in full.

- This amount is 1000 (2004/2005), 2000 (2005/2006), 5000 at current (2006/2007), but the South African Revenue Services or relevant Tax Authority may change this amount from time to time. This depreciation amount is prescribed by the legislation, and the amount may differ when the Tax Authorities issues new legislation or practice notes.

- When writing the depreciation off of this item, you need to leave a nominal value of 1, to indicate that the asset still exists in the business.

- For instance, if a cellular telephone was purchased for the business at a cost price of 900, an amount of 899 may be written off as depreciation. The nominal value of 1 will stay in the books until the cellular phone is lost, stolen, sold or disposed of. Only when the asset is disposed of, the value of 1 will be cleared, when the profit or loss with the sale of the fixed asset is calculated.