Methods of calculating depreciation in agriculture
Not everything will appreciate or increase, sometimes things do depreciate.
But how will you calculate the depreciation value of assets (machines, buildings, equipments, etcetera) in agriculture.
That’s the main reason why I created this post.
There are more than one method for calculating depreciation.
Three of the methods which are used for calculating the depreciation value of assets are the straight-line method, the reducing balance method and the revaluation method.
Under this method, the annual charge for depreciation is found by subtracting the salvage value from the cost of the asset and dividing the result by the number of years that the asset is expected to be in operation.
Depreciation per annum = (cost of asset – estimated salvage value)/expected number of years of the asset.
Example; A machine costs ₦10,000. It has an expected life of four years, and has an estimated salvage value of ₦256. The depreciation provision per annum will be:
(₦10 000 – ₦256)/4 = ₦2,436.
Note that the method assumes that the value of the asset decreases at a constant rate.
It therefore means that the current value of an asset can be found by subtracting the depreciation value from the cost price.
Reducing Balance Method
Under reducing balance method, which is also called the reducing installment method, the total depreciation is spread over the anticipated useful life of the asset by annual installments of diminishing amount.
These amounts are computed by taking a fixed percentage of the current value of the asset as reduced by previous provisions for depreciation.
Example; A machine costs ₦10,000 and the depreciation provision is 60% per annum. Calculate the depreciation for the first four years.
Depreciation provision at 60% of ₦10,000 = 10000 – 6000.
Value at end of year 1 = 4,000.
Depreciation provision at 60% of ₦4,000 = 4000 – 2400.
Value at end of year 2 = 1,600.
Depreciation provision at 60% of ₦1,600 = 1,600 – 960.
Value at end of year 3 = 640.
Depreciation provision at 60% of ₦640 = 640 – 384.
Value at end of year 4 = 256.
That’s the answer to the question.
Annual Revaluation Method
The farmer invites an expert to come and revalue his assets at the beginning and at the end of each year.
He then subtracts the value of his assets in the current year from the value in the previous year.
I am that you now know the techniques used for calculating depreciation of assets in agriculture.
If you have any questions, feel free to leave a comment below
Get Latest Updates For Free
Subscribe to our mailing list and get interesting stuff and updates to your email inbox.
Thank you for subscribing.
Something went wrong.