Page 242 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes 10.3.6 Revaluation or Appraisal Method

As its name is indicating, depreciation is calculated on the basis of revaluation of assets. After
some time or interval of a year, the assets are revalued by experts. The difference of the valuation
of the two periods is called depreciation or appreciation of that period. Generally, this method
is used in the case of livestock, copyrights and patents.

10.3.7 Depletion Method

It is also known as production method. This method is useful for natural assets as coal mines, oil
wells, etc. These are taken for excavation for a definite period on the contact basis. In this case the
depreciation is computed on the basis of production. First the total production of the contract
period is estimated, then total depreciable cost is divided by the total production and multiplied
by annual output to determine the annual amount of depreciation. In the form of formula:
Annual Output
Annual Depreciation =
Total Estimated Output
10.3.8 Machine Hour Rate Method

When depreciation is calculated on the basis of working hours of the machine or plant, this
method is used. The original cost of plant or machinery is divided by the total number of
working hours of the machine or plant to find the machine hour rate. To compute the depreciation
of a year the machine hour rate is multiplied by the total working hours of the machine/plant
in a year. This procedure may be explain in the following formula -
Original Cost of Machine
Machine Hour Rate =
Total Working Hours of the Machine During its Life
Annual Depreciation = Machine Hour Rate × Working Hours in a Year

Notes Straight line method vs. Written down value method

Under this method of charging depreciation, unlike the straight line method, the percentage is
usually given for calculation. While calculating this method, the depreciation is calculated on
two different values.

Depreciation

Depreciation for initial year Depreciation for subsequent years

Depreciation on original value Depreciation on book value
at the beginning during later period

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