DISSIMILARITIES IN BETWEEN THE STRAIGHT LINE METHOD AND WRITTEN DOWN VALUE METHOD - Accounts and Finance for Managers

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

Illustration

On 1st April, 2000, a firm purchases machinery worth Rs. 3,00,000. On 1st Oct, 2002 it buys additional machinery worth Rs. 60,000 and spends Rs. 6, 000 on its erection. The accounts are closed normally on 31 Mar. Assuming the annual depreciation to be 10% Show the machinery account for 3 years under the written down value method.

ACCOUNTING JOURNAL ENTRIES FOR THE YEAR 2000-01

ACCOUNTING JOURNAL ENTRIES FOR THE YEAR 2000-01

Depreciation for the year 2000 for the first machinery

ACCOUNTING JOURNAL ENTRIES FOR THE YEAR 2001-02

ACCOUNTING JOURNAL ENTRIES FOR THE YEAR 2001-02

JOURNAL ENTRIES FOR THE YEAR 2002-03

During the year 2002 new machinery worth of Rs. 60, 000 was purchased. Before determining the volume of depreciation, the amount of original value of the machinery should be found out.
Original value of the asset = The purchase price of the asset + Erection charges incurred
= Rs. 60, 000 + Rs. 6, 000 = Rs. 66, 000

JOURNAL ENTRIES FOR THE YEAR 2002-03

Machinery A/c 2002-03

Merits:

  • The depreciation is charged under this method only in line with the efficiency. It means that during the early years of the usage, the efficiency of the asset is more than that of the later part of the life of the asset.
  • The depreciation volume under this method is greater during the early years of the asset than the later periods of the asset.
  • It evades the possibility of incurring losses due to obsolescence.

Demerits:

  • It is a tedious method in computation.
  • Under this method, the book value of the asset at end of the economic life period is never equivalent to zero.

Suitability: This method is most suitable in the case of depreciating the worth of patent which is subject greater risk of technological obsolescence. This method is most suitable in the case of patent design of a car, cellular phone design, pharmaceutical patent and so on. These are having greater technological risk which prefers the firms to write off the expenditures in more volume during the early years in order to recover the investment through matching early period revenues. “Early recovery is better the principle”


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