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What is Straight Line, Written Down and Annuity method in Depreciation?


Depreciation: It is a gradually decrease in value of an assets over time. It is charged to Profit and Loss A/c and shown in debit side where all losses and expenses are shown. There are common  methods are used to calculate depreciation like
o   Straight line
o   Written Down
o   Annuity method

Straight Line Method: Under this method fixed amount of depreciation charged on asset. By using this method asset value either become zero or equal to residual value. It is also known as Fixed Instalment Method, Original Cost Method or Base Method.

Formula:
Depreciation = (Original cost of asset-Residual Value) / Estimated life of asset

Original cost of asset: It includes purchase price of asset, installation cost, repair charges and freight charges etc.
Residual (Salvage) Value: It is a remaining value after estimated life of asset.
Estimated life of asset: It is an estimated life of asset in which it is capable to generate revenue for the company.
Example: A machine has been bought for Rs.80, 000 in 1st January 2008 and its instalment cost and freight charges are Rs.1000 and Rs.800 respectively. Salvage value of a machine is Rs.2000 and estimated life is 15 years. Find out the depreciation cost and prepare 3 years Machine a/c.

Solution: 
Cost of asset = Rs. (80, 000+1000+800) = Rs.81800
Depreciation = (Original cost of asset-Residual Value) / Estimated life of asset
= (81, 800-2000)/15
=Rs.5320

Date
Particular
J.F
Amount
Date
Particular
J.F
Amount
1/01/
2008
To Cash a/c
81, 800
31/12/
2008
By Depreciation a/c
5320
By balance c/d
76, 480
81, 800
81, 800
1/01/
2009
To balance b/d
76, 480
31/12/
2009
By depreciation a/c
5, 320
By balance c/d
71, 160
76, 480
76,480
1/01/
2010
To balance b/d
71, 160
31/12/
2010
By depreciation a/c
5, 320
By balance c/d
65, 840
71, 160
71, 160

Written Down Method: It is also known as Diminishing Balance Method. Under this method the depreciation charged on debit balance of asset account. The depreciation amount decreases from beginning to the end of the year. It does not remain same in every year. At the end of the year the value of asset become zero. It is a best method of depreciation because due to the time passes the value of asset is decreases and this method helps to ascertain the true value of asset.

Formula:
D = [1-n√ (s.v/c)]100
Where,
D = depreciation rate
N = expected life of asset in years
S.V = scrape value
C = cost of asset

Example: Company X purchases a machinery for Rs.1, 90,000 and spend Rs.15000 on its installation charge. The scrap value is Rs.40, 000 after 15 years. Find out the rate of depreciation and prepare 2 years Machinery A/c.

Solution:
D = [1-n√(s.v/c)]100
= [1-15√(40, 000/2, 05,000)]100
=[1-(0.19512)1/15]100
= 10.33%

Date
Particular
J.F
Amount
Date
Particular
J.F
Amount
1st year
To Cash a/c
2, 05,000
By Depreciation a/c
21, 176.5
By balance c/d
1, 83,823.5
2, 05,000
2, 05,000
2nd year
To balance b/d
1, 83,823.5
By depreciation a/c
18, 988.9
By balance c/d
1, 64,834.5
1, 83,823.5
1, 83,823.5



Annuity Method: Under this method besides depreciation, interest is also consider which earn on capital invested in asset. In asset a/c interest on capital is debited and depreciation a/c is credited. The depreciation amount remain same year after year. The value of asset decreases until it become zero or equal to residual value at the end of expected life of asset by adding the interest and deducting the depreciation amount with in asset a/c.

Example: Company purchased a lease on January 1st 2012 at a cost of Rs.60, 000 for 5 years. It was decided to charge interest at the rate of 4% p.a. Find out the depreciation value with the help of annuity table and also prepare 4 year machinery a/c.

Solution: An annuity value at 4% for 5 years is 0.224627
Depreciation =0.224627*60,000 = 13,477.62
                                                                                                    
Date
Particular
J.F
Amount
Date
Particular
J.F
Amount
Jan 1,
2012
To Bank a/c
60, 000
Dec
31,
2012
By Depreciation a/c
13, 477.62
Dec 31,
2012
To interest a/c
2, 400
Dec
31,
2012
By balance c/d
48, 922.38
62, 400
62, 400
Jan1,
2013
To balance b/d
48, 922.38
Dec
31,
2013
By depreciation a/c
13,477.62
Dec312013
To interest a/c
1, 956.89
Dec
31,
2013
By balance c/d
37, 401.65
50, 879.27
50, 879.27
Jan1,
2014
To balance b/d
37, 401.65
Dec
31,
2014
By depreciation a/c
13,477.62
Dec31
2014
To interest a/c
1, 496.06
Dec
31,
2014
By balance c/d
25, 420.09
38, 897.71
38, 897.71
Jan1,
2015
To balance b/d
25, 420.09
Dec
31,
2015
By depreciation a/c
13,477.62
Dec31
2015
To interest a/c
1, 016.80
Dec
31,
2015
By balance c/d
12, 959.27
26, 436.89
26,436.89


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