What are the other different types of methods used to calculate Depreciation?

Depreciation Fund Method: Under this method the fixed amount is credited to depreciation fund a/c and that amount is charged from Profit & Loss account as depreciation. The equal amount is invested in outside securities (gilt-edge security) and the interest earn from it is reinvested in securities. When the life of asset is over at that time the securities are sold out and money is realised to purchase new asset. This method is also known as Sinking Fund Method and with the help of sinking fund table we can find out the depreciation amount.

Example: In January 1^st 2009 Company was purchased a machine for Rs.70, 000. The estimated life of asset is 4 years. Company had decided to charge depreciation @ 5% by using sinking fund method.  On 2012 machine was sold out at Rs.51, 100. Prepare depreciation fund a/c and depreciation fund investment a/c.

Solution: depreciation = 0.232012*70,000 = Rs.16, 240.84

  

Depreciation Fund A/c

Date	Particular	J.F	Amount	Date	Particular	J.F	Amount
Dec 31, 2009	To balance c/d		16, 240.84	Dec 31, 2009	By depreciation a/c		16, 240.84
			16, 240.84				16, 240.84
Dec 31, 2010	To balance c/d		33, 293.72	Jan 1, 2010	By balance b/d		16, 240.84
				Dec 31,	By interest  (depreciation fund investment a/c)		812.04
				Dec 31	By depreciation a/c		16,240.84
			33, 293.72				33, 293.72
Dec 31, 2011	To balance c/d		51, 199.25	Jan 1, 2011	By balance b/d		33, 293.72
				Dec 31,	By interest a/c		1, 664.69
				Dec 31,	By depreciation a/c		16, 240.84
			51, 199.25				51, 199.25
Dec 31, 2012	To machine a/c (transfer machine a/c)		70, 000	Jan 1, 2012	By balance b/d		51, 199.25
Dec 31,	To depreciation fund a/c (Loss transferred)		99.25	Dec 31,	By interest a/c		2, 559.96
				Dec 31,	By depreciation a/c		16, 240.84
				Dec 31,	By Profit & Loss a/c (balance transfer to profit & loss a/c)		99.2

Depreciation fund Investment a/c

Date	Particular	J.F	Amount	Date	Particular	J.F	Amount
Dec 31, 2009	To bank a/c		16, 240.84	Dec 31, 2009	By balance c/d		16, 240.84
			16, 240.84				16, 240.84
Jan 1, 2010	To balance b/d		16, 240.84	Dec 31, 2010	By balance c/d		33, 293.72
Dec 31	To bank a/c		17, 052.88
			33, 293.72				33, 293.72
Jan 1, 2011	To balance b/d		33, 293.72	Dec 31, 2011	By balance c/d		51, 199.25
Dec 31	To bank a/c		17, 905.53
			51, 199.25				51, 199.25
Jan 1, 2012	To balance b/d		51, 199.25	Dec 31, 2012	By bank a/c		51, 100
				Dec 31,	By depreciation fund a/c		99.25
			51, 199.25				51, 199.25

Revaluation method:
Under this method the assets are valued at the end of the year and if the value decreases then the difference between the current year asset value and previous year asset value is treated as depreciation amount. This method is applicable on patent, trademark, copyright, loose tools and live stock etc.

Depletion Unit Method: It is applicable on wasting assets or non-current or assets or natural resources like quarries, mines etc.

Formula:

(Original cost of asset*Output of one year) / Total expected quantity in asset   

Insurance Policy Method: It is similar to depreciation fund method but instead of investing money in outside securities, the money is invested in endowment policy and depreciation amount is treated as premium which is paid to insurance company every year. When the policy matures, the money is received and from that money old assets are replaced by new one. In this method depreciation a/c and insurance policy a/c are prepared but they do not include interest.

Sum of the years’ Digits Method:

Formula:

Cost of asset-Scrap Value*(Estimated life of asset/ Number of years in descending order

Example: Company purchases machinery at the cost of Rs.90, 000 and the scrap value is Rs.12, 500. The estimated life of asset is 6 years. Find out the depreciation amount in 2 years.

Solution: Cost of asset-Scrap Value*(Estimated life of asset/ Number of years in descending order

Depreciation in 1^st year = (90, 000 – 12, 500)*6 / 6+5+4+3+2+1

= 77, 500 * 6 / 21

= Rs.22, 142.86

 Depreciation in 2^nd year = 77, 500 * 5/21

= Rs. 18, 452.38

Machine Hour Method: Under this method scrap value is deducted from cost of machine and then divides from estimated life of machine in hour. After then multiply with number of hours machine would run in year.

Formula:

[(Cost of machine – Scrap value) / Estimated life of machine (in hours)] * Number of hours machine run in year

Example: Company purchases machinery at the cost of Rs.85, 000 scrap value already deducted. The estimated life of machinery is 26,000 hrs. The machine has run 1, 600 hrs in 1^st year. Find out the depreciation in 1^st year.

Solution: Depreciation = [85, 000/ 26,000]* 1, 600

= Rs. 5, 230.77