Method of Providing Depreciation

there are mainly three methods of charging depreciation as per AS 10.

1.   Straight Line Method:- In this method a fixed Amount is written off during the working life till asset become nil. This method is simple and accurate. This method is also known as fixed Installment method /Original cost method. Lease holds property generally depreciated by fixed installment method.

 Straight Line Depreciation = Cost of Assets-Scrap value

                                                                       Useful life.

2.   Reducing Balance Method/ diminishing value method/ written down method:-- Under this method, a fixed percentage of diminishing value of asset is written off each year. Annual charge of depreciation decreases from year to year.

3.   UNIT OF PRODUCTION METHOD – In this method depreciation is charged on the basis of expected use or unit of production.

Other methods of depreciation

1.   Sum of years of Digit Method.-- It is a variation of Reducing Balance method.

Formula for calculating Depreciation.

Original cost = scrap value   The number of years (including present year) of remaining life of asset.

                                                                 Total of all digit of life of assets (in years)

Suppose the estimated life of assets is 10 year, the total of all digits from 1 to 10 is 55 .i.e.

10+9+8+7+6+5+4+3+2+1 or by formula.

N(n+1)  = 10x11  = 5

    2               2

Depreciation to be written off in the first year will be 10/55 of the cost of asset less estimated scrap value and depreciation for second year will be 9/55 of cost of assets less estimated scrap value and so on.

(1) Annuity Method

- In this method element of interest on capital invested also considered and it write off the value of asset as well as interest cost over the life of assets.

- It is assumed that capital invested on assets if invested elsewhere would earned interest which must be considered as part of cost of Assets.

- Amount of Depreciation is to be charged annually is ascertained from Annuity Tables, to write off interest on capital as well as capital invested on assets.

Relevant Journal entries are:-

              (1)For charging interest on assets Account

Assets A/c                                        Dr.

        To Interest A/c

(1)          For charging Depreciation on asset

Depreciation A/c                                     Dr.

        To Assets A/c

(2)          For transferring depreciations to P & L A/c

Profit and loss A/c                                   Dr.

            To Depreciation A/c

(3)          For transferring interest to Profit & Loss A/c

Interest A/c                                             Dr.

          To P & L A/c

Sinking Fund Method:-

The sinking fund method is adopted to provide depreciation in a case where the nature of assets is such as which require large fund at the time of replacement of such assets. The depreciation fund ensure that when replacement is due , ready cash will be available.

The amount written off as depreciation is kept aside and invested in readily saleable securities. The interest received on securities is also reinvested. The securities accumulate and when the life of the assets expires, the securities are sold and new assets are purchased with the help of the sale proceeds.

Since, the securities always earn some interest, it is not necessary to invest the amount equal to full amount of depreciation. It may be something less.

ð How much amount is to be invested every year so that a given sum is available at the end of a given period, depends on the rate of interest and will be known from the sinking fund table.

ð Sinking fund table shows- how much is to be invested every year together with interest earned so that at the end of the period one get Rs. 1.00.

(2) Machine hour Method:-

- Under this method, depreciation is calculated on the basis of machine hour that machine worked.

- Machine hour rate of depreciation is calculated after estimating the total number of hours that machine would work during its whole life.

- However total number of machine hour during its life may varied from time to time on consideration of changes in economic and technological conditions, so in those circumstances we will adjust depreciation accordingly.

- It is slight variation of straight line method.

(3) Production Units Method:-

Under this Method, depreciation is calculated; on the basis of production units that machine will produce during its useful life.

Depreciation for the period= Depreciable Amount *Production during the year

                                                                                                                    Estimated total production

#MethodofProvidingDepreciation