§
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, we get: 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:
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 ¸ 10) is
an example of the Straight Line Method of Depreciation.
·
Written down value, applicable to machines that have high rates of
depreciation in the initial year or two, and later taper it e.g. a car, is a
usable method.
It can be of many types:
For example,
EXAMPLE OF DOUBLE DECLINING
BALANCE METHOD: [The Double Declining Method takes an amount (usually
double, i.e. 200% of the amount that we take in the Straight Line Method) and
applies it to the book value of an asset each year]: Suppose the asset costing Rs.16,000 has AN ESTIMATED USEFUL LIFE OF 5 YEARS, the depreciation
would be calculated as follows:
This example also shows
accelerated, i.e. realistic, depreciation in early years of the machine's life,
when its productivity/ book value is higher, as opposed to its fall in value in
later years, and commensurate retarded depreciation. Comparison
of Methods of Depreciation: ·
Many companies choose straight-line method for reporting
depreciation to shareholders because net income is higher in early year. ·
Because net income is lower in early years, some companies
prefer the written down value method, especially for Income Tax purposes. |