|Methods of Depreciation|
Depreciation may be defined as the permanent and continuing diminution in the quality or the value of an asset. William Pickles
Depreciation is the gradual and permanent decrease in the value of an asset from any cause. R.N. Carter.
- Depreciation is fall in the value of the fixed assets (except Land).
- Depreciation is charged as an expense in the Profit and Loss Account in order to spread the cost of a fixed asset over the asset’s useful life.
- Depreciation is charged on a continuous basis. Once the depreciation is charged, it must be charged on regular basis in the succeeding period also.
Calculation of Depreciation
Straight line or Fixed Installment Method
A fixed or equal amount is to be charged as depreciation every year during the life time of the asset. The amount of depreciation remains equal from year to year. The expected lifetime of the asset is calculated and the cost of the asset is spread over its lifetime.
Depreciation expense per annum=Original cost/number of years of useful life
If the fixed asset is expected to have a scarp value at the end of its useful life, then
Depreciation expense per annum= (Original cost-Estimated scrap value)/Number of years of useful life
Reducing Balance or Diminishing Balance Method
The value of asset goes on diminishing year after year, the amount of depreciation charged every year also goes on declining. Every year a fixed percentage of the net book value of the asset is reduced. For example 20% depreciation is charged. If the asset has a value of $10000, the depreciation for the first year will be 20% of $10000 i.e. $4000. The book value for the next year will be now $6000. This year the depreciation will be again 20% of the remaining value i.e. 20% of 6000=$1200. So the remaining value of the asset is now $6000-$1200=$4800.
Under this method, the fixed asset is valued at the end of every accounting period. The difference between its value at the end of the period and the beginning of the period will be the depreciation for that period.
Depreciation expense=Value of asset at the end-Value of asset at the beginning + Any new purchase
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