Page 131 - DCOM101_FINANCIAL_ACCOUNTING_I

Unit 11: Depreciation Accounting

(d) In the case of loss the following entry is passed: Notes

Cash Account Dr.
P. & L. Account Dr.
To Assets Account

11.3 Methods of Charging Depreciation

There are various methods of depreciation:
1. Straight line method

2. Depletion or Output method
3. Machine hour rate method
4. Diminishing Balance or Written down method
5. Sum of digits method
6. Annuity method

7. Sinking fund method and
8. Insurance policy method
In this unit we will discuss only about the straight line method and diminishing balance
method.
11.4 Straight Line Method

Under this method, depreciation is calculated as a fixed proportion on the original value of the
asset. The depreciation is charged as fixed in volume on the original value of the asset at which it

was purchased. The original value of the asset is nothing but the purchase value of the asset.
Illustration 1:
. Cost of Machine - `1,00,000
Estimated life of the machine - 5 years

Scrap value-Nil
Cost of the machine - Scrap value
Depreciation =
Economic Life period of the asset in years
According to the concept of depreciation, the value of the asset is dispersed throughout the life
of the period in order to match the respective earnings of the year after year. The purchase value
of the asset is an expenditure to be stretched to many number of years in order to equate with
the revenues. To equate the revenues, the scrap value of the asset at the end of the life period is
realized should be deducted and apportioned to the total number of the economic life period of
the asset. The aim of deducting the scrap value of the asset is reducing the original value of the
investment.
` 1,00,000 – 0
Depreciation = = ` 20,000
5

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