As a Nigerian See How To Calculate The Depreciation Your Farm Assets
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It is a foregone conclusion that agricultural tools, machines, livestock and other assets do depreciate after they are being used for a long period of time. You will realize that some tools tends to perform effectively when you newly bought them, but it will get to a point where they hardly carry out their tasks. This phenomenon is known as depreciation.
What is Depreciation?
Depreciation is the reduction or decrease in the quality and efficacy of an asset or a tool after lengthy period of time. A depreciated farm tool won’t be able to perform its function to give you 100% satisfaction.
However, there are different levels of depreciation because every tool has its unique level of depreciation depending on many factors.
Factors That Determine The Intensity Of Depreciation In the Value Of A Tool
1. Level Of Maintenance
The way you care for an asset or an agricultural tool will determine how fast it will depreciate. You can be sure of recording minor level of depreciation if you provide quality maintenance for all your assets.
2. How Often You Use Them
This is another factor that determines the level of depreciation an asset will suffer or experience. The more you use an asset, especially farm implements, the more they tend to depreciate in no time.
This is because they undergo too much pressure while they are being used, which will surely lead to loss of strength in the long run.
3. Quality Of Products
Fake or counterfeit tools are liable to depreciate very fast and easy because they have little no quality required to stand the test of time.
This is why it is very important you go for high quality products whenever you are set to get a farm tool or other related assets.
How To Calculate Depreciation?
Now that you know that assets have different depreciation level, you’re now expected to know how to calculate the depreciation of an asset.
There are three ways to calculate depreciation of an asset. They include: The straight-line method, the reducing balance method and the revaluation method.
1. Straight-line Method
This method helps you to determine the annual charge for depreciation of an object. Using this method, you are required to subtract Salvage Value from cost of the asset. Then, you should divide your answer by the number of years the product or tool is expected to last.
It is important to know that using this method means that the tool has a constant decrease in value throughout the year.
In summary, straight-line method of calculating the depreciation of a tool in a year is mathematically written as: Depreciation per annum = (cost of asset – estimated salvage value)/expected number of years of the asset.
Example of How to Calculate Depreciation Using The Straight-forward Method
Question: The price of a new machine was ₦1,500, and it’s expected to function for four years. If its estimated Salvage Value is ₦500. Calculate its depreciation per annum.
Solution: The depreciation per annum will be equal to: (₦1500 – ₦500)/4 = ₦250
2. Reducing Balance Method
The reducing balance method is also known as the reducing installment. Using this method, you will need to spread the total depreciation over the anticipated valuable or useful lifespan of a product by annual installment of diminishing amount.
Example of How To Calculate Depreciation Using Reducing Balance method
Question: You bought a machine at the rate of ₦15,000 and the depreciation provision is 50% per year. Calculate the depreciation for the first three years.
Solution:
1st year
Depreciation provision at 50% of ₦15,000 = 15000 – 7500.
Value of the machine at end of 1st year = 7,500.
Second Year
Depreciation provision at 50% of ₦7,500 = 7500 – 3750.
Value of the machine at end of second year = 3,750.
3rd Year
Depreciation provision at 50% of ₦3,750 = 3750 – 1875.
Value of the machine at end of third year = 1875
3. Annual Revaluation Method
In this method, an expert is expected to evaluate the value of a product or machine at the start of a year to know its worth.
The same expert will be summoned to reevaluate the worth of the same machine at the end of the year to know the level of depreciation suffered by the tool during the year.
The expert is expected to subtract the second evaluation from the first evaluation to get an accurate answer.