The characteristics of depreciation are essential factors in determining depreciation

May 24, 2018 | By admin4u | Filed in: Uncategorized.

Depreciation characteristics

Depreciation has the following characteristics:

(1) Depreciation is only charged on fixed assets, for example building, plant and machinery, furniture, Current assets, such as stocks, debtors, accounts receivable, etc. In case – they do not calculate depreciation.

(2) Depreciation results in a continuous, gradual and continuous decrease in the value of the asset

(3) the last day of estimated life of the asset [4] Depreciation is due to the use of the asset In some cases, depreciation may also occur, if the devices are not used, eg. (6) Depreciation does not depend on fluctuations in the market value of the asset

(7) The amount of depreciation of the accounting year

can not be accurately determined – it must be estimated. However, in some cases it can be accurately stated, eg. Ownership, patent law, copyright, etc.

(8) The depreciation of an asset may not exceed the depreciable amount (cost reduction with perishable value)

Essential Factors for Determining Depreciation

(1) The original cost of fixed assets, ie the purchase price and freight and installation costs;

(2) Estimated amount of repairs during the useful life

(3) Estimated useful life of the asset after which it must be discarded;

(4) estimated residual value or residual value; [5] investment interest – the amount invested in the purchase of the asset,

(6) the possibility of obsolescence

Fixed install or original cost or straight line method reduces / decreases the balance method

put on a cost tool. It is calculated at book value. device. The carrying amount of an asset is recognized by deducting depreciation. The carrying amount of the asset is gradually reduced due to depreciation. As the depreciation percentage refers to the device's moderation. This method is referred to as a decreasing balance or a decreasing installment payment method or a valuation method.

Merits and demerits

The underlying balance method is not only matched to depreciation costs in relation to related revenues but also rather widespread. the occurrence of depreciation and correction (ie higher depreciation, but more difficult corrections in later years) to the income statement over the life cycle of the assets. Much of the cost in the early years also minimizes the effect of obsolescence. Governance is also beneficial as accelerated depreciation means lower taxable profits and taxes, so lower cash outflow.

Accelerated depreciation methods

Sum of year digits (SYD). This depreciation method accelerates depreciation costs so that the amount recognized in earlier periods of useful life of the asset is greater than the value recognized in recent periods. SYD was found to estimate the useful life of the asset in years, then consecutive numbers are assigned each year and we add these numbers. N years,

Annuity Method

The method recognizes the time value of money (interest) and hence the real cost of using a long-lived asset that is the same as the actual invested the amount lost and the interest earned on the asset. According to this method, annual depreciation is calculated as the asset decreases the value by reducing the interest rate and decreases to zero by the end of the asset's life. Thus, the amount to be depreciated each year is the same, but the interest rate will fall each year.

The amount of depreciation per annum, which is to be depreciated using the Annuity method, is calculated as annual depreciation on the basis of this method, according to this method, the Sinking Fund Method

. He tries to secure the required lump sum by surrendering annually with a long, life-saving asset and investing in a fixed amount in easy-to-realize securities. These securities seek interest at fixed interest rates and re-sell the same value together with consecutive fixed-term depreciation details that are aggregated with interest. The descent base method therefore takes this probable interest income into account, while recording the annual depreciation and investing the same, which, together with the compound interest rate, accumulates at the end of the useful life on the depreciable cost of the asset. Obviously, the fixed portion of annual depreciation is smaller than the straight-line method. However, its size affects the lifespan and interest rates of the asset. The longer the duration and the higher the ratio, the lower the annual depreciation of the depreciation cost of the rupee.

Deficiencies in the depreciation fund method

The depreciation fund method should provide a constant rate of return on identical securities for each periodic invest- ment. This is hardly true in this dynamic world where prices depend. Any change in the rate of return will overwhelm the prior periodic allocation of depreciation and will result in its recapture. Moreover, the amount realized on the sale of security rarely corresponds to the acquisition cost, as both fluctuations and significant fluctuations are due to the fluctuations. They can cause a large gap between the necessary and the cash available.

Insurance Policy Method

This method strives to retire the specified asset by retiring the temporary contribution (premium). In this case, the trader accepts a "leverage policy" from an insurance company that undertakes to pay a certain amount on a given day when the dealer regularly pays fixed fees. The trader handles the periodic payment as depreciation and recognizes it as a profit and loss account. In this case, depreciation will be charged at the end of the year, while the fee will be paid at the beginning of the year. Insurer makes insolvent cash withdrawal from retirement. Generally, the amount received is more than the total premium when the bond yield is interest.

Revaluation Method

We evaluate the device every year and compare the value with the beginning of the year. Fall should be treated as depreciation. Suppose the value of the tools was Rs at the beginning of the year. 8000, the year assets are worth Rs. 6000 units were purchased, and at the end of the year when evaluating Rs. 11,000. Amount of annual depreciation: 8,000 + 6,000-11,000 = Rs. 3000. This method is useful for eliminating depreciation on livestock and loose assets.

Depletion Method

Natural resources include physical assets such as mineral deposition, oil and gas springs, and wood stock. These natural resources are depleted of exploitation. In some cases, the decrease in physical deposits is counterbalanced by the growth or development of additional deposits.

The cost of natural resources is the price paid for the acquisition and the price paid for the development of such a device, so that the state is fit for production.

Periodic depletion is better not to count during the year. Rather than calculating the cost per unit, and then multiplying the cost of one-year units

Hours of work

According to this method, the total number of hours of a machine over the whole year estimates the actual lifecycle and then the machine's cost is the expected hours of useful life divide this rate by hourly. In calculating the annual depreciation, this ratio is multiplied by the number of hours, and the machine actually runs one year.

Mileage Method

This method is only used for devices whose useful life depends on how many miles, eg buses, cars, trucks, vehicles, etc.


These methods of depreciation show that nothing is necessarily the best or the worst since it is the best or worst thing to do each method has its own merit and disadvantage. The applicability of each method depends on a number of factors. The most important of these is the type of asset and purpose of depreciation.

A straight line method is suitable for buildings and leasing, etc. Reduction of installment payment method fits with machine equipment etc. And exhaustion method is a waste of tools like mines. quarries, etc. The underlying purpose, however, is the fundamental determinant of the adequacy of the depreciation method. An important goal is the real meaning of accounts, tax incentives, comparative product costs, financial flexibility, exchange and expansion, etc. the depreciation fund method envisages that the amount allocated for depreciation should be invested outside the business on specified securities. Likewise, in the policy of insurance policies, the set amount is transferred to the insurer. If an enterprise has a problem with working capital, then advice on these methods can be questioned.

Among the methods mentioned above (1) is the fixed payment installment and (2) reduced itemized methods are most widely used

and reduced payment method

Fixed installment payment method

1. The degree and extent of depreciation are equal to each year

. The amortization rate is calculated on the basis of the cost of the asset

3. At the end of his life, the value of the device is reduced to zero or residual value.

4th The older the tool, the bigger the repair cost. But the amount of depreciation is the same annually. Thus, the amount of depreciation and repairs increases every year. This gradually reduces the annual profit

5. The calculation of depreciation is relatively simple and simple.

Reduction of installment payment

The interest rate remains the same, but the degree of depreciation is gradually decreasing.

2nd The depreciation rate is based on the carrying amount of the asset

3. The lifetime value of the asset never drops to zero.

4th The amount of depreciation gradually decreases while the cost of repair increases.

Thus, depreciation and repairs are more or less the same every year so there is little or no change in annual profit / loss

5. Depreciation can be calculated without difficulty, but it is not easy and simple.

Source by Anil Kumar Gupta

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