Methods of Depreciation
- Straight Line Method
Under this method, depreciation is charged at a fixed rate on the original cost of the asset for its whole life span. This method is also known as Original Cost Method, Equal Installment Method, and Fixed Installment Method. This method can be easily applied for those assets whose useful life can be estimated accurately. To calculate the value of depreciation through this method, the following formula is used:
Deprecation = (Original Cost of Asset - Estimated Scrap Value) / Estimated Life Span of the Asset
- Reducing-balance Method
Under this method, the value of asset diminishes every year, and the value of depreciation also decreases every year. This method is also known Reducing Installment Method or Diminishing Balance Method. This method is suitable to use for the assets with long life span which losses more value when used, such as plant, machinery, motor vehicles etc.
Depreciation on this method is calculated on the net carrying amount or net book value. This mean that the net book value has to be first calculated before calculating depreciation.
Net book value = Cost less Accumulated depreciation.
- Revaluation Method
It is one of the easiest methods to calculate the depreciation. Under this method, the assets are revalued at the end of the financial year and then this balance is compared with the initial value of the assets at the beginning of the financial year. The difference between the values is considered as the amount of depreciation. It can be understood as:
Depreciation = Opening value of asset less closing value of asset.
It is mostly use on assets that cannot be depreciated using the other methods such as Spares tools, kitchen utensils etc.