Page 232 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes Distinction between Fixed Instalment Method and Diminishing
Value Method of Depreciation Fixed Assets
Basis of Difference Fixed/Straight Line Method Diminishing Value Method
1. Basis of charge and amount of Depreciation is calculated on the Depreciation is a certain
depreciation. basis of original cost of asset i.e. percentage of value of assets. The
Cost scrap value if any No. of amount of depreciation decreases
useful life of assets (in years). The every year.
amount of depreciation remains
constant (fixed) every year.

2. Value of assets Value of asset becomes zero at Value of asset can never be zero
the end of its life. even thought the asset becomes
obsolete/useless.
3. Burden of depreciation. The burden of depreciation The burden of depreciation is
remains uniform as the amount heavier in the beginning but
of depreciation remains constant becomes lighter in the subsequent
every year. years.
4. Suitable system. This method is suitable to such The method is suitable to such
assets where the cost of assets, assets where a the cost, scrap
scrap value if any and life of asset value of asset and life of asset
are easily known and the burden cannot he ascertained easily and
of repairs in not much or remains the burden of repairs also
constant. increases.
5. Income Tax point of view. This system is not recognized This method is considered
under income tax rules. suitable under income tax rules.
6. Effect on profit and loss a/c In the begining, the amounts of The amount of depreciation of
depreciation repairs charges are repairs charges total change on
lesser but increases in subsequent P&L A/c remains constant
years. Though the amount of though the amount of
depreciation remains constant depreciation decreases but
but the amount of repairs repairs changes increase and over
increases because of higher all burden on P&L remains
maintendence changes constant.

Illustration 5: Sale of Assets and Written Down Value Method
Lakshmi Narain Company Ltd., whose accounting year is the calendar year purchased machineries
on 1st April, 2006 costing 45,000.
It further purchased a machine costing 30,000 on 1st October, 2006 and another machine costing
15,000 on 1st July, 2007.
On 1st January, 2008 of the machineries which were purchased on 1st April, 2006 one machine
costing 15,000 became obsolete and was sold for 4,500.

Prepare the machinery account for all the three years in the books of the company after charging
the depreciation at 10% per annum on written down value method.
Solution:
In the Books of Lakshmi Narain Co. Ltd.
Machinery Account
Date Particulars ( ) Date Particulars ( )
2006 2006
April 1 To Cash A/c 45,000 Dec. 31 By Depreciation A/c 4,125
Oct. 1 To Cash A/c 30,000 Dec. 31 By Balance c/d 70,875
75,000 75,000
2007 2007 Contd...

Jan. 1 To Balance b/d 70,875 Dec. 31 By Depreciation A/c 7,837.50
July 1 To Cash A/c 15,000 Dec. 31 By Balance c/d 77,737.50
85,875 85,875
226 LOVELY PROFESSIONAL UNIVERSITY
2008 2008
Jan. 1 To Balance b/d 77,737.50 Jan. 1 By Bank (Sale of 1/3
machine) 4,500
By P&L A/c. (Loss on
sale) 7,987.50
By Depreciation A/c 6,555
By Balance c/d 58,995
77,737.50 77,737.50