Depreciation, Provisions and Reserves

 

Methods of providing depreciation :

1. Straight line method :

  1. This method is also known as 'original cost method'
  2. Under this method, depreciation is charged at fixed percentage on the original cost of the asset, throughout its estimated life.
  3. Under this method the amount of depreciation is uniform from year to year. That is why this method is also known as 'Fixed Installment Method' or 'Equal installment method'.
  4. The annual amount of depreciation can be easily calculated by the following formula :
    Annual Depreciation = Original cost - Estimated scrap value
                                                          Estimated life

For example :

A firm purchases a machine for Rs 2,25,000 on April 1, 2011. The expected life of this machine is 5 years. After 5 years the scrap of this machine would be realized Rs 25,000. Under straight line method, the amount of depreciation can be calculated as under.

Hence, Rs 40,000 will be charged each year as depreciation on this machine

2. Diminishing balance method :

Under this method, depreciation is charged as a fixed percentage on the book value of the asset every year. In first year the depreciation will be charged at the end of the year, on the total cost of the asset.

For example :

Year Book Value (Rs) Depreciation @ 10% (Rs)
2008-09 20,000 2,000
2010-10 20,000--2,000=18,000 1,800
2010-11 18,000--1,800=16,200 1,620
2011-12 16,200--1,620=14,580 1,458

Hence, in this method, rate of depreciation is same but same but amount of depreciation goes on decreasing every year. Therefore, this method is also known as 'written Down Value Method' and 'Reducing Installment Methdo'.

Illustration 1.

On January 1, 2008, a firm bought a machine for ` 90,000 and spend ` 6,000 on its installation and ` 4,000 on its carriage. It is decided to charge depreciation @ 10% on straight line method. Books are closed on December 31, each year. Show Machinery Account for the year 2008 to 2010.

Illustration 2

On the basis of information given in Illustration 1, show Machinery Account for the year 2008 to 2010 if depreciation is charged @ 10% on diminishing balance method.

Solution :

 

CBSE Accountancy Class XI ( By Mr. Aniruddh Maheshwari ) 
Email Id : [email protected]

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