What are the methods of depreciation
It first calculates the depreciable base (cost less salvage) before dividing it by number of years (life of machine) to arrive at annual rate of depreciation. The straight-line method is the most straightforward method of Asset Value Depreciation. But:
§ Not all equipment deteriorates equally e.g. a car, over its useful life.
§ Methods based on actual usage: total life are too cumbersome to be practicable
For Example: Say a machine costs Rs. 10,000 and Rs. 1,000 (as additional set-up/installation/maintenance expenses) = Rs 11,000 but we anticipate/guess its Kabari (Scrap Value) at Rs. 3,000 at the end of its useful life, of say, 10 yrs,
Cost of Machine + Installation + Directly Associated Costs = Total Cost
Total Cost - Salvage Value (At end of 10 yr. Period) = Depreciable base
10,000 + 1,000 =11000 (Total cost)
11000 – 3,000 = 8,000 as the Depreciable Base
Depreciable Base = Rs. 8,000, Spread out over
10 yrs = Rs. 8000/10(Yrs) = Rs 800/- depreciation per year.
This happens when we accurately assess asset life, but:
- If the machine outlasts its estimated life, we stop depreciation thereafter. If it fetches more salvage value, we book a Gain. If salvage value is 5000, against 3000 (Book Value at end of 10 yrs), we show a Gain of Rs. 2000. If the machine becomes obsolete after a mere 3 years, depreciation is 3(yrs) x 800 (p.a.) = 2400/-, less scrap value Rs. 500/-, we have a net loss of
11,000 – 2400 = Rs. 8600 (book value) – 500 (salvage returns) = Rs 8,100 (loss).
Cost = 11000
Annual Depreciation = 800 x 3= 2400 = 8600 (Book value)
(Book value) 8600 – 500 (salvage value) = 8100 (Net loss)
Proportionate Annual Depreciation of Rs. 800 (8000 ё 10) is an example of the Straight Line Method of Depreciation.Source: www.openlearningworld.com