Q. Distinguish between Straight Line and Written Down
Method of providing depreciation.
Straight Line Method/Original Cost Method/Fixed Instalment
Method: Under this method, the amount of depreciation
is uniform from year to year. This fixed amount of depreciation
is charged to Profit and Loss A/c every year. The annual amount
of depreciation can be easily calculated. Out of the cost
of the asset its scrap value id deducted and it is divided
by the number of years of its estimated life.
| Depreciation |
|
Original Cost – Scrap
Value |
| = |
|
| |
Estimated life of Asset |
Written Down Value Method/Diminishing Balance Method/Reducing
Balance Method: Under this method also the cost of the
assets less estimated scrap value has to be written off over
its estimated life. A certain percentage is calculated on
the book, and not the cost of the asset. Thus the amount of
depreciation goes on falling every year. The value of asset
never comes to zero under this method.
Difference between Straight Line
Method and Written Down Value Method
- Amount of Depreciation: The amount of depreciation
remains the same all the years under straight-line method,
while it goes on decreasing every year under the written
down value method.
- Computation of Depreciation: Under straight line
method of depreciation, depreciation is charged on the original
cost of the asset, while it is charged on the reducing balance
every year under written down value method.
- Value of Asset: Under the straight line method
the value of the asset become nil at the end of its working
life but it never becomes nil under the written down value
method.
- Rate of Depreciation: Normally, the rate of depreciation
is lower under straight-line method whereas it is higher
under the diminishing balance method.
- Recognition: The straight line method of depreciation
is not recognized by the income tax authorities while the
later method is well recognized by them.
|
Accounts
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