There are various methods of depreciation:
Among the above mentioned methods, Straight line method and Diminishing balance or written down method are more important methods. These two methods are preferable and renowned methods among the industrialists in charging the depreciation on the fixed assets. The first method is as follows
Straight Line Method
This method, depreciation is calculated as a fixed proportion on the original value of the asset. The depreciation is charged as fixed in volume on the original value of the asset at which it was purchased. The original value of the asset is nothing but the purchase value of the asset.
Cost of Machine – Rs. 1, 00, 000
Estimated life of the machine – 5 years
According to the concept of depreciation, the value of the asset is dispersed throughout the life of the period in order to match against the respective earnings of the year after year The purchase value of the asset is an expenditure to be stretched to many number of years in order to equate with the revenues. To equate the revenues, the scrap value of the asset at the end of the life period is realized should be deducted and apportioned to the total number of the economic life period of the asset. The aim of deducting the scrap value of the asset is reducing the original value of the investment
From the above table, Rs. 20,000 is charged on every year to recover Rs. 1,00,000 during its life period i.e. 5 years
Original value of the investment- Rs. 1, 00, 000
Scrap value – Rs. 10, 000
Life of the asset -5 years
The scrap value of the asset is expected to realize only at the end of the life period of the asset i.e. 5 years.
Mr.Shankar purchased machine for Rs. 90, 000 on 1st April 1999. It probable working life was estimated at 5 years and its probable scrap value at the end of that time is Rs. 10,000. You are required to prepare necessary account based on straight line method of depreciation for five years
To prepare the various accounts of the enterprise connected to depreciation is as follows
The depreciation charge process is carried out in three stages
The preparation of Plant & Machinery account : It is very simple to prepare the machinery Ledger account
M/s Muruganand &Co is a trader bought furniture costing Rs 2,20,000 for his new branch on 1st April, 2000. As the furniture bought was superior quality material. The auditors estimated its residual valued at Rs. 20,000 after a working life of ten years. Further additions were made into the same category on 1st Oct, 2001 and 1st April, 2002 which costing Rs 16,800 and Rs. 19,000 (with a scrap value of Rs 800 and Rs. 1000 respectively). The trader closed his accounts on 31st Mar every year and wanted to apply straight line method of depreciation. Show the furniture a/c for four years.
First step is to find out the depreciation of the furniture for various number of years i-e 4 years. The depreciation is to be calculated on every year.
The most important point to be borne in our mind while calculating depreciation, the following points to be taken into consideration
First, is there any % of depreciation charge given. If given, the depreciation to be calculated on the volume of available balance at the end.
Secondly, if the % of depreciation charge is not given in our problem, How the volume of depreciation can be calculated ?
The depreciation can be calculated as follows
In this problem, due to absence of depreciation %, the above illustrated formula should have to be applied throughout the problem
ACCOUNTING ENTRIES FOR THE ACCOUNTING YEAR 2000-2001
ACCOUNTING ENTRIES FOR THE ACCOUNTING YEAR 2001-2002
ACCOUNTING ENTRIES FOR THE ACCOUNTING YEAR 2002-2003
ACCOUNTING ENTRIES FOR THE ACCOUNTING YEAR 2003-2004
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