For example, If the asset is purchased for Rs.2, 00,000 and depreciation is to be charged at 10% p.a. on reducing balance method, then
Depreciation for the 1st year = 10% on Rs.2, 00,000, i.e., Rs.20,000
Depreciation for the 2nd year = 10% on Rs.1, 80,000 (Rs.2, 00,000 –– Rs.20, 000)
= Rs. 18,000
Depreciation for the 3rd year = 10% on Rs.162, 000 (Rs.180, 000 - Rs.18, 000)
= Rs.16, 200 and so on.
Merits
In earlier years the amount of depreciation is more and the amount of repairs and renewals is less whereas in later years the amount of depreciation is less and the amount of repairs and renewals is more therefore the total charge (i.e., depreciation plus repairs and renewals) remains almost uniform year after year, since,This method is recognized by the Income Tax authorities
It is a logical method as the depreciation is calculated on the diminished balance every year.
Demerits
It is very difficult to determine the rate by which the value of asset could be written down to zero.Click here to go back to Depreciation: Day 6
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