Page 229 - DMGT104_FINANCIAL_ACCOUNTING

Unit 10: Accounting and Depreciation for Fixed Assets

These methods are given below: Notes
1. Straight Line Method
2. Diminishing Balance Method or Written Down Value Method
3. Annuity Method
4. Depreciation Fund Method

5. Insurance Policy Method
6. Revaluation Method
7. Depletion Method
8. Machine Hour Rate Method

10.3.1 Straight Line Method

This method is also known as fixed installment method. In this method, depreciation is ascertained
on the original cost by a fixed percentage keeping in mind the scrap value of the assets. Under
this method the amount of depreciation remains uniform/fixed and the value of the asset
becomes zero at the end of its life. It may also be calculated by the following formula:
Original Cost – Scrape Value
Depreciation =
life of Assets in Year

Merits

Following are the merits of this method:
1. This method is very simple and easy to use.
2. The value of the asset becomes zero at the end of the life of the assets as total value is
divided by the life of the assets.
3. This method is suitable to such type of assets which take physical deterioration as buildings,
leasehold properties, etc.

Demerits

In spite of being so many merits mentioned above, this method has following demerits:

1. The amount of depreciation does not change while the amount of repairs and renewal
increases with the passage of time.
2. Under this method the amount of depreciation is not invested outside the firm. Therefore,
there is a loss of interest.
3. If any other asset is purchased during the year, depreciation is calculated separately.
4. This method is not recognized in income tax rules.
Illustration 3: Fixed Installment Method

Mr. Ramesh purchased a second hand machine for 24,000 on 1st April, 2006. He spends 10,000
on its overhaul and installation. Depreciation is written off 10% p.a. on the original cost. On 30th
June, 2008 machine was found to be unsuitable and sold for 19,000. Prepare the machine
account from 2006 to 2008 assuming that accounts are closed on 31st December, every year.

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