Published on February 16, 2014
Methods of Depreciation • Straight Line Method • Written Down Value Method 1
Straight Line Method It is a very popular method because its simplicity & consistency. A fixed amount of original cost is charged as a depreciation every year. Annual depreciation = Cost of the assets – Residual value Estimated Economic life 2
Straight Line Method Advantages • It is simple to calculate & easy to understand. • It can reduce the book value of the asset to zero. • The valuation of the asset each year in the balance sheet is reasonably fair. Disadvantages • It ignores the fact that the service yielding ability of the asset fall while the repairs & maintenance cost increase with the passage of time. • If an additional asset is acquired, the amount to be charged as depreciation needs to be calculated. 3
Written Down Value Method • Amount of depreciation goes on declining every year and is recognized by income tax law. 4
Estimation of Written Down Value Method Advantages • Easy calculation. • Balanced effect on Profit & Loss account in different years. • Approved method by Income tax authorities. • Logical method. • Suitable for assets having long life. Disadvantages • The value of asset can not be reduced to zero. • No funds for replacement. • Loss of interest. • Higher rate of depreciation. • In equal burden on Profit & Loss account. 5
Difference between WDV & SLM Method Bases of Difference 1. Basis of charging depreciation 2. Total charge against profit and loss account in respect of depreciation and Written Down Value Book value Fixed year Declines year after year. Unequal year after year. Almost equal every year. Not recognized Recognized It is suitable for assets in which repair charges are less, the possibility of and obsolescence is low scrap value depends upon the time period involved. It is suitable for assets, which are affected by technological changes and require more repair expenses with passage of time. Annual depreciation 3. Straight Line Method Original Cost 4. repair Recognition by income Tax 5. Suitability 6
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