Methods of Depreciation
To find out the depreciation of assets or any kind of property, there are different forms or kinds of methods are available. The different kinds of depreciation methods are as follows:
1. Fixed Installment or Straight line method.
2. Diminishing Balance or written down value method.
3. Sums of the digit method
4. Annuity method
5. Depreciation fund or Sinking fund method
6. Insurance policy method
7. Revaluation method
8. Activity method
1. Fixed Installment or Straight Line Method
This may also be called the fixed installment method. Under this system the same percentage rate is used each year and the amount of the depreciation charged is the same each year. It is used for fixed assets which provide equal benefits to the business each year they are in operation. Using this method, it is possible for an asset to reach a nil value in cases where no residual value is expected. The straight-line method of depreciation is widely used and simple to calculate. It is based on the principle that each accounting period of the asset's life should bear an equal amount of depreciation.
Under this method, an equal amount of the value of asset is allocated as depreciation in each accounting year over a period of its effective life time. The depreciation will be calculated up to the salvage of the value of assets.
2. Diminishing Balance or Written Down Value Method
Reducing balance method of depreciation
This may also be called the diminishing balance method. Under this method the same percentage is used each year but, because it is calculated on a different value each year, the amount of depreciation will reduce each year. At the end of the first year the agreed percentage of depreciation is deducted from the cost of the fixed asset. In later years the same percentage is used, but it is calculated on the cost of the asset less the depreciation already charged (the reduced balance). This means that a higher amount of depreciation will be charged against profits in the early years of the life of the fixed asset. Reducing balance depreciation is used for assets which, in the early years, have lower maintenance costs but give greater benefits than in later years. As the depreciation is always calculated as a percentage of the written-down value (reduced balance) of the fixed asset, the asset will never reach a nil value in the books. Any estimated residual value will be taken into consideration when the percentage rate is decided upon.
Under this system, depreciation will be calculated as a certain percentage of the value of the assets. This will be shown as reduced in the books of depreciation.
3. Sums of the Digit Method
Under this system, uses a constantly reducing rate to calculate the depreciation of assets. This is similar to the straight line method which means, this uses a constant system to calculate the value of assets. This uses some digits to find out the amount of depreciation in each year.
4. Annuity Method
Under this system, the purchase amount is assumed as the investment and the interest from that investment also will be considered in the case of calculation of depreciation of assets.
5. Insurance Policy Method
Under this system, an insurance policy will be taken for the assets and this matures when the assets are replaced.
6. Revaluation Method
Under this system, the reduction of the value of assets will be treated as the depreciation for the concerned assets.
7. Activity Method
Under the activity method, usage of assets is given more importance than the passage or efflux ion of time for assets of any kind of property. The activity may take place in different forms or kinds they are as follow:
• Production Unit Method
• Machine Hour Method
• Service Unit Method
• Depletion Method.
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