All fixed assets depreciate (tend to decrease in value with use) over a period of time. There are several types of depreciation, but mainly four types of depreciation are used to calculate the depreciation of a fixed asset. They are the straight-line method of depreciation, the declining balance method of depreciation, the activity depreciation method, the sum of years' digits depreciation, the units of production depreciation and the units of time depreciation. In the straight-line method of depreciation, the company estimates the salvage value of the asset after the lapse of time of the depreciation period.
The declining balance method is a type of accelerated method. It recognises a higher depreciation cost at an earlier stage in the lifetime of the asset. Activity depreciation does not take into account the time, but depreciation under this method is calculated on the basis of a level of activity. The sum of years' digits method is a historical method of calculates depreciation. The units of production depreciation and the units of time depreciation methods take into account the production and time taken for depreciation of assets in mining operations respectively.
There are two types of depreciation – the straight line method and the written down value method. The rates of depreciation under the two methods vary as the useful life of the asset remains the same irrespective of the method of depreciation used. Under straight line method, a fixed percentage is applied on the original cost of the asset, thereby ensuring that the depreciation per annum over the useful life is constant. Under written down value method, a fixed percentage is applied on the written down value (original cost less depreciation charged till the end of the previous year) of the asset. This results in higher depreciation in the earlier years and lesser depreciation in the later years.
Normally the depreciation rate under written down value is higher than the rate under straight line method. This ensures creation of depreciation provision over the useful life of the asset.
Straight line method and written down method
Define type of depreciation with example...?
Straight Line Method & written down value method
Depreciation is explained in both accounting and economic terms.
There are two types of depreciation in terms of real capital assets namely; physical depreciation and functional depreciation. The physical depreciation is the total loss in market value which is caused due to some of the physical activities. This depreciation involves any kind of repairs that involve cost. In this depreciation there are two kinds, one that is curable and the other that is incurable. The curable one is the one, which can be corrected economically. The other, which is the incurable, involves huge amounts of cost. Subsequent the Functional Depreciation is the total loss caused by inadequate design.
In the subject of accounting there are two types of depreciation; Book Depreciation and Tax Depreciation. Book Depreciation is done for the reference of the company in order to report its financial records to its share holders, stockholders, etc. Tax Depreciation is simply done for the reason of collecting taxes.
Physical depreciation and functional depreciation
Straight line method and reducing balance method
Depreciation :it is a perminant continuing and gradual shrinkage in the book valueof a fixed assest.
1. Fixed instalment method or Stright line method
Dep.Cost price-Scrap value/ Estimated life of asset
2. Diminishing Balance Method : Under this method, depreciation is calculated at a cartan percentage each year on the balance of the asset, which is boughtforward from the previous year.
3.Annuity Method : Under this method spent on the purches of an asset is regarded as an investment which is assumed to earn intrest at a certain tate . Every year the asset a/c is debited with the amount of interest and credited with the amount of depreciation.
Straight line method,sum of the digit method,revaluation method and reducing balancing method.