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Types of depreciation:

Straight line method

a) Straight line method -

MEANING OF DEPRICIATION : This is the simplest method of allocation of an even rate of depreciation every year over the useful life of the asset. The formula for straight line method as follows.

(Asset cost – Residual cost) / Useful life of the asset

e.g - Suppose a company purchases a machinery for Rs. 5,00,000 and the useful life of the machinery are 10 years and the residual value of the machinery is Rs. 50,000.

Annual Depreciation expenses = (5, 00,000-50,000) / 10 = Rs. 45,000

Unit of production method

b) Unit of production method

In this method equal expense will be allocated to each unit of production. The method is very useful in assembly for production lines. Hence, the calculation is based on output capability of the asset rather than the number of years. There are two steps as follows:

Step 1: Calculate per unit depreciation:

Per unit Depreciation = (Asset cost – Residual value) / Useful life in units of production.

Step 2: Calculate the total depreciation of actual units produced:

Depreciation Expenses = Depreciation per unit xUnits Produced.

e.g: XYZ P. LTD company purchase a printing machine in order to printing flexes atRs. 50,000 with a useful life of 1, 80,000 units and residual value of Rs. 5000, It will be prints 5000 flex.

Step 1: Per unit Depreciation = (50,000- 5000)/180,000 = Rs. 0.25

Step 2: Total Depreciation expense = Rs. 0.25 * 5000 = Rs. 1250

So the total Depreciation expenses will be Rs. 1250 which is taken in to account. Once the per unit of depreciation is found out, it can be applied for future output.

Written down value method

c) Written down value method

Written down value of depreciation is also known as diminishing balance method. This accounting technique reduces the value of an asset by a set percentage in each year. When selling the asset, the book value is used to help determine the minimum value for which it will be sold. As the book value reduces by the annual charge of depreciation; it is also known as reducing balance method.
ABC LTD. Purchase machinery for Rs 1, 00,000, and the estimated useful life is 10 years. The estimated salvage value of the machine at the end of its useful life is Rs. 20,000. If depreciation at 20% will be charge every year on the written down value of the machine.The calculation under the written down value method after charging depreciation for 5 years will be as shown below.

Year Cost/WDV DEPRICIATION@20% Net Value in Rs.
1st 100000 20000 80000
2nd 80000 16000 64000
3rd 64000 12800 51200
4th 51200 10240 40960
5th 40960 8192 32768

In the above e.g of straight line method of depreciation present that net book value of the assets at the end of the 5thyear is Rs 32,768, so as the salvage amount shows that Rs 20,000, still the asset is behind Rs 12,768 (32768-20000) remain left to be written off.

There are two types of deprecation calculated in Indian accounting standard.

  • a) Depreciation as per Income tax act
  • Business concern other than companies i.e Proprietorship, partnership, HUF , BOI are always follow depreciation method of accounting under Income tax act 1961. So their depreciation rate will be fixed under provision of Income Tax.

  • b) Depreciation as per Companies act
  • b)Companies i.e. Private Limited & Limited, those registered under Indian Companies act. 1956 must be follow depreciation method under provision of Companies act.

So naturally there is two types of depreciation rate is followed in Indian Accounting standard which is given next page.

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