AGRICULTURAL ECONOMICS AND FARM MANAGEMENT

CHAPTER 3
 DEPRECIATION

In this part we will learn about the various things related to depreciation

Depreciation definition

Depreciation methods

Valuation of Assets
• Defined as the annual loss in value of durable assets
due to use, wear, tear, age, and obsolescence
• A business expense that reduces annual profit
• A reduction in the value of an asset
 Assets that depreciate!

• a useful life of more than one year

• a determinable useful life but not an unlimited
life
• a use in business
Examples: vehicles, machinery, equipment,
building, fences, purchased breeding livestock,
wells. Land is not depreciable, but some
improvements to land (e.g. drains) are depreciable.
 Depreciation Terms

• Cost: the price paid for the asset

• Useful life: number of years the asset is
expected to be used in business
• Salvage value: expected market value of the
asset at the end of its useful life
• Book value: the asset’s original cost less
accumulated depreciation
 Depreciation Methods

• Straight Line
• Sum-of-the-Year’s Digits (SOYD)
• Declining Balance
STRAIGHT LINE METHOD
DIMINISHING BALANCE METHOD
SUM OF THE YEARS DIGITS METHOD
Calculate depreciation for a machine with
a cost of INR 10,000, a salvage value of INR 2,000,
and a useful life of 10 years.
 SUMMARY OF DEPRECIATION

A depreciation schedule is a necessary part of any accounting system. Depreciation

is an expense used to calculate profit, and depreciation reduces the value of assets.
Depreciation used for tax purposes may differ from economic depreciation and
managers may need to calculate both. Valuation methods for business assets were
also discussed.
 FEATURES OF VARIOUS DEPRECIATION METHODS

Straight line depreciation method charges cost evenly throughout the useful life of a fixed asset.
This depreciation method is appropriate where economic benefits from an asset are expected
to be realized evenly over its useful life.

Reducing Balance Method charges depreciation at a higher rate in the earlier years of an asset.
The amount of depreciation reduces as the life of the asset progresses.

The sum of the years' digits method is used to accelerate the recognition of depreciation.
Doing so means that most of the depreciation associated with an asset is recognized
in the first few years of its useful life. The method is more appropriate than the more
commonly-used straight-line depreciation if an asset depreciates more quickly or
has greater production ca-pacity in its earlier years than it does as it ages.
 What is cost?

Cost of cultivation-The cost of cultivation expressed in Rs./Ha.

Cost of Production-The cost of production expressed in Rs./Quintal.

 Meaning of Agricultural Holding in India:

The term ‘agricultural holding’ indicates average size of agricultural land

held by the farmers in India.

There are four different concepts of holding:

(a) Economic holding-Economic holding indicates that particular size of
holding which will provide necessary support to the peasant family. In
this connection Keating observed that economic holding is one “which
allows a man the chance of producing sufficient to support himself and
his family in reasonable comfort after paying his necessary expenses.”
(b) Basic holding-The basic holding is smaller than economic holding and
it offers only subsistence living to farmers.
(c) Optimum holding-Optimum holding is defined by the Agrarian
Committee as three times of economic holding.
(d) Family holding-The family holding (introduced by Five Year Plan)
implies an area which is equivalent to either a plough unit or a unit of
average family having a pair of bullocks. Land reforms panel observed
that a family holding should provide an annual income worth Rs. 1200 to
an average farmer family.