Friday, October 3, 2014

Written Down Value Method of Depreciation

This method is also called as Diminishing Balance Method. In this method depreciation is charged at a fixed percentage each year on the reducing balance (i.e., cost less depreciation) of asset. The amount of depreciation goes on decreasing every year.
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.

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