PREGUNTAS FORMULADAS A UN FUNCIONARIO DE LA SNI Del mismo modo, líneas seguidas se presenta el conjunto de preguntas hechas a un

Straight Line Method Diminishing Balance Method

(i) Depreciation is charged at a fixed rate on the original cost of the asset.

(i) Depreciation is charged at a fixed rate on the original cost in the first year and on the written down value (cost-minus total depreciation) in the subsequent years. (ii) The amount of depreciation remains the same

in all the years of useful life of the asset.

(ii) The amount of depreciation goes on decreasing year after year.

(iii) The total burden on the profit and loss account is more in the later years because the repair charges increase while the amount of depreciation remains the same.

(iii) The total burden on the profit and loss account is almost same in the early years as well as is the later years because of more depreciation plus repairs cost in the beginning and less depreciation plus more repairs cost in the later years.

(iv) The book value of the asset becomes zero or equal to scrap value.

(iv) The book value never becomes zero. (v) It is easy to calculate the rate of depreciation. (v) It requires the use of mathematical tables. (vi) It is suitable where repair charges are less

and obsolescence is not frequent.

(vi) It is suited where repair charges are more in later years and also where there is obsolescence.

Illustration 6:

A firm acquired machinery on 1st July 2008 at a cost of ` 45,000 and spent ` 5,000 for its installation. The firm writes off depreciation at 10% per annum on diminishing balance method. The books are closed on 31st March every year. Show Machinery Account and Depreciation Account for three years.

Solution:

Dr. Machinery Account Cr.

Date Particulars ` Date Particulars `

2008 Jul 1 Jul 1 To Bank To Bank (Installation Expenses) 45,000 5,000 ______ 2009 Mar.31 Mar.31 By Depreciation (10% on`50,000 for 9 months) By Balance c/d 3,750 46,250 50,000 50,000 2009 April 1 To Balance b/d 46,250 ______ 2010 Mar. 31 Mar. 31 By Depreciation (10% on`46,250) By Balance c/d 4,625 41,625 46,250 46,250 2010 April 1 To Balance b/d 41,625 ______ 2011 Mar. 31 Mar. 31 By Depreciation (10% on`41,625) By Balance c/d 4,163 37,462 41,625 41,625 2011 April 1 To Balance b/d 37,462 Dr. Depreciation Account Cr.

Date Particulars ` Date Particulars `

2009

Mar.31 To Machinery A/c 3,750 2009

Mar.31 By Profit & Loss A/c 3,750 2010

Mar.31 To Machinery A/c 4,625 2010

Mar.31 By Profit & Loss A/c 4,625 2011

Mar.31 To Machinery A/c 4,163 2011

Mar.31 By Profit & Loss A/c 4,163

2. Sum of Years’ Digits Method

In this method, the charge for depreciation for an accounting period is calculated in proportion of the remaining life of the asset at the beginning of every accounting period. The rate of depreciation is determined by the fraction where denominator is the sum of the digits representing the life of the asset and the numerators are individual digits used in the life of asset taken in reverse order.

Depreciation goes on decreasing every year.

Depreciation = Remaining life of the asset including current year x Cost of the asset Sum of the digits of the life of asset in years

3. Double Declining Balance Method

This method is similar to reducing balance method explained above except that the rate of depreciation is double the straight line rate. Allowance for scrap value of the asset should not be allowed.

Advantages:

– The total cost of the asset is evenly spread over the economic life of the asset and such annual charge includes cost of depreciation and repairs.

– Initially, the depreciation charged is more compared to subsequent years. This is advantageous since there is considerable tax-saving, demand for funds in the initial year is more and money at present is more beneficial than money in future.

C. OTHER METHODS

1. Depletion Method

This method is applicable in case of wasting assets, e.g. mines, quarries, oil well etc. from which a certain quantity of output is expected to be obtained.

Under this, depreciation is charged on the basis of output extracted in comparison with the estimated total contents of mine.

Rate of Depreciation = Total cost of mine Total units

Depreciation = Quantity extracted during the year X Rate of Depreciation ADVANTAGES

– It relates depreciation with the use of the asset.

DISADVANTAGES

– It is difficult to estimate the output correctly.

2. Machine Hour Rate Method (Service Hours Method)

Under Machine hour rate method, depreciation is allocated in proportion to the degree of asset used for production. The useful life of the asset is fixed in terms of hours. This method of depreciation can be charged on plant, machinery, vehicles etc.

Rate of Depreciation = Original Cost of Asset - Scrap Value Life of the Asset in Hours

Depreciation = Actual number of hours x Rate of Depreciation ADVANTAGES

Depreciation is related to actual working time of the asset.

DISADVANTAGES

This method can be used only when the life of the asset can be measured in terms of hours.

3. Group Depreciation Method

Assets having same average life expectancy are grouped together. Depreciation is not charged for each item but is charged for the group as a whole.

4. Inventory System of Depreciation

In case of assets of small value, the life of the asset cannot be accurately determined, e.g., loose tools, cattle etc. Depreciation in this case will be calculated as follows:

Value of asset at the beginning of the year XXX

Add: Additions during the year XXX

Total XXX

Less: Estimated value of asset at the end of the year XXX