METHOD OF DEPRECIATION

There are several alternative methods of computing depreciation A business need not use the same method of depreciation for all its various assets the method used for computing depreciation expense in financial statement may differ the methods used in the preparation of the company  income tax return

STRAIGHT LINE METHOD
The simplest and most widely used of computing depreciation is the straight line method under this method an equal portion of the assets cost is recognized as depreciation expense in each period of the assets useful life.Annual depreciation expense is computed by deducting the estimate residual value or salvage value from the cost of the assets and dividing the remaining depreciable cost by the year of estimated useful life.

Illustration: Assume that office furniture was purchased at Rs.48,500having its estimated life years and after 5 years its scrap value will be Rs.3500 computing the depreciation under straight line method.

   cost of furniture              48,500
less estimated scrap value    3,500
 Depreciable cost     =       45,000

Annual depreciation = cost-salvage value
                                 Estimated useful life
 
                              =    48,500-3500
                                          5 
                   
                             =        45000____
                                           5
                             =        9000
                         





UNITS OF OUTPUT METHOD
       The certain kinds of assets more equitable allocation of the cost can be obtained by dividing the cost minus salvage value if significant by the estimated units of output rather than by the estimated years of useful life at the end of each year the amount of depreciation.

ILLUSTRATION :                          
Assume that a plant was purchased at Rs.285,000 and its residual value is estimated to be Rs.105,000.its total production capacity is 100,000 units in the business with best quality of product with normal repair and maintainance in this method depreciation can be computed as under:

 depreciation rate per unit =    cost-salvage value
                                             estimated life in units
                           
                            =     285,000-105,000
                                        100,000
                          
                          =               180000___                   
                                        100,000

 depreciation rate per unit =         1.80

DIMINISHING BALANCE METHOD

This method a certain percentage is determined as a fixed rate of calculating the depreciation  on any asset,that fixed rate will be applied to depreciable cost of each year such as first year rate will be applied to the total cost of asset,second year same rate will be applied to the total cost minus the first year depreciation (depreciated cost of first year) balance ;third year the same rate will be applied to the depreciated cost of the second year balance The same technique will be applied of the asset expired life until depreciable cost is brought down to scrape value.It is the same method also know as diminishing balance method.In this method a certain percentage is determined as a rate of depreciation on any asset.if the rate of depreciation is not given then first of all we will apply straight line method to find the amount of annual depreciation then we find the rate of depreciation by the formula below :
                                    Amount of yearly depreciation x100
                                            Depreciable amount

ILLUSTRATION :
Assume that cost of machine is Rs.160,000 and the fixed percentage applied to assets is 20% the depreciation will be computed as under:

Total cost of the assets machine                              1,60000                                                                                   

first year depreciation charge                              (-) 32,000_

depreciable cost first year                                      1,28000     

second year depreciation charge on

diminishing balance  (128000@20%)                   (-) 25,600_

diminishing balance /depreciable cost                      10,2400

third year depreciation charge(102400@20%)   (-) 20,480__

diminishing balance                                                                  81,920

fourth year depreciation charge(81920@20)       (-) 16,384___

depreciable cost                                                                       65,536 __

PRODUCTION  HOURS METHOD:

A more equitable distribution of the cost of some plant or machine assets can be obtained by this method ,because often a time basis is unable to provide the accurate measure of period wear and tear is actually the main cause of such plant machine depreciation therefore,it can be obtained by dividing the original depreciable cost by the estimated life in hours rather than years of useful life
.
Illustration
Assume that a machine was purchased at Rs.225,000 and its salvage value Rs.25000 useful life estimated to be 50,000 hours production only, with normal maintenance.In this method depreciation can be computed as under:-

Hourly depreciation rate =   cost – scrap value_____

                                                      Estimated life in hours

                                              =  225,000 – 25000

                                                  50,000 hours

                                             =    2,00,000    

                                                  50,000

                                             =   4.00Hours