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We had a good read. For the benefit of yourself. Be sure to read to the end. I want you to get good knowledge from Cash For Junk Cars In Atlanta.Depreciation has the following characteristics:
(1) Depreciation is expensed in case of fixed assets only, e.g., Building, Plant and Machinery, Furniture 'etc. There is no inquire of depreciation in case of current assets-such as Stock, Debtors, Bills Receivable etc.
(2) Depreciation causes perpetual, gradual and continuous fall in the value of asset
(3) Depreciation occurs till the last day of the estimated working life of asset
(4) Depreciation occurs on account of use of asset In distinct cases, however, depreciation may occur even if the assets are not used, e.g., Leasehold Property, Patent right, Copyright etc.
(5) Depreciation is a payment against wage of an accounting period.
(6) Depreciation does not depend on fluctuations in store value of asset
(7) The number of depreciation of an accounting year cannot be considered precisely-it has to be estimated. In distinct cases, however, it may be ascertained exactly, e.g., Leasehold Property, Patent Right, Copyright etc.
(8) Total depreciation of an asset cannot exceed its depreciable value (cost less scrap value).
Basic factors of measurement of depreciation
(1) former cost of fixed asset i.e., buy price plus freight and installation expenses;
(2) estimated number of expenditure on repairs during the beneficial life;
(3) estimated beneficial life of asset after which it will be discarded;
(4) estimated residual or scrap value;
(5) interest on investment-the number invested on buy of asset, if it had been invested in some other investment what interest would have been earned;
(6) possibility of obsolescence.
Fixed Installment or former Cost or right Line Method, reducing/Diminishing balance method
Under this recipe depreciation is not calculated on cost of asset. It is computed on the book value. Of asset. The book value of the asset is obtained by deducting depreciation from its cost. The book value of asset moderately reduces on account of depreciation charge. Since the depreciation percent rate is applied on reducing balance of asset. This recipe is called reducing balance or diminishing installment recipe or written down value method.
Merits and demerits.
Declining balance recipe not only equitably matches depreciation expenses against the associated wage but also fairly spreads. The incidence of depreciation and repairs (viz higher depreciation but heavier repairs in later years.) on behalf and loss account over the assets life span. Elimination of major part of cost in early years also minimizes the impact of obsolescence. It is equally beneficial to supervision as accelerated depreciation means smaller assessable profits and taxes hence lesser outflow of cash.
Accelerated Depreciation Methods
Sum-of-the year's digits (Syd). This recipe of depreciation accelerates depreciation expenses so that the number recognized in the earlier periods of an asset's beneficial life are greater than those recognized in the latter periods. The Syd is found by estimating an asset's beneficial life in years, then assigning consecutive numbers to each year, and totaling these numbers. For n years,
Syd = 1 + 2 + 3 + 4 + ... +n
Annuity Method
The recipe recognizes the time value (Interest) of money and hence regards the real cost of using a long-lived asset equivalent to the actual number invested thereon plus the interest lost on the acquisition of asset. Under this method, so much depreciation is written off each year as after debiting the asset account with interest upon the diminishing value, will cut the asset to nil at the end of its life. Thus, the number written off as depreciation is the same every year, but the interest will diminish each year.
The number of annual depreciation to be written off by Annuity recipe will be ascertained from Annuity Tables
Depreciation Fund recipe or Sinking Fund method
Under this method, a fixed number is expensed as depreciation every year. It endeavors to contribute the required lump sum cash at the retirement of a long, lived asset by annually setting aside and investing a fixed sum in readily realizable securities. These securities earn interest at fixed rate and the same being reinvested along with successive fixed installments of depreciation, allowed to gain at composition interest. The sinking fund recipe thus takes into account of this probable wage from interest while fixing the annual depreciation and investing the same which together with composition interest accumulated to the asset's depreciable cost by the end of its beneficial life. Obviously, the fixed installment of annual depreciation is here smaller as compared to right line method. Its magnitude, however, rests on the asset's life span and interest rate. Longer the span and higher the rate, smaller is the annual depreciation per rupee of depreciable cost.
Shortcomings of Depreciation Fund Method
Depreciation fund recipe assumes constant rate of return on every periodic investment in same securities. This is hardly true in this dynamic world where rates do vary now and then. Any unlikeness in the rate of return upsets the earlier periodic funds for depreciation and entails refection thereof. Supplementary the number realized on the sale of security rarely agrees with its acquisition cost owing to made fluctuations which may be both erratic and considerable. Those may cause a wide gap between the required and supplied cash.
Insurance procedure Method
This recipe endeavors the contribute of required cash at the retirement of a specified asset in return of periodic gift (premium). Under this a trader takes a 'Capital Redemption insurance Policy' from an insurance enterprise which undertakes to pay at a given date a distinct sum if the trader, paying a fixed number of premiums after regular intervals. The trader treats the periodic payment as depreciation and charges it to behalf and loss account. In this case, depreciation is expensed at the end of the year, whereas, the selected is paid at the beginning of the year. At maturity, the insurance enterprise pays the procedure money which is regularly sufficient to replace the retired set. Normally, number received is more than total selected paid as the procedure yields interest.
Revaluation Method
Under the system, each year the asset is valued and the value is compared with that in the beginning of the year. The fall is treated as depreciation. Suppose if the value of the tools at the beginning of the year was Rs. 8,000, during the year tools worth Rs. 6,000 were purchased and at the end of the year, on valuation these amounted to Rs. 11,000. The number of depreciation for the year will be : 8,000 + 6,000-11,000 = Rs. 3,000 . This recipe is beneficial for charging depreciation on livestock and loose tools.
Depletion Method
Natural resources include bodily assets like mineral deposits, oil and gas resources and timber stands. These natural resources get exhausted by exploitation. In some cases, the reduction in bodily deposits is offset by growth or improvement of Supplementary deposits.
The cost of natural resources is the price paid for its acquisition plus price paid for improvement of such asset in order to bring it to a state favorable for production.
The periodic depletion is great not calculated in terms of year. Rather it is great to conjecture the cost per unit and then multiply the cost of unit to units produced in that particular year.
Machine Hour Rate
Under this method, the total number of working hours of a machine during the whole of its productive life is estimated, and then the cost of machine is divided by the unbelievable number of hours of beneficial life, this gives the rate per hour. The annual depreciation is calculatedly multiplying this rate by the number of hours, the machine admittedly runs in a year.
Mileage Method
This recipe is used only for those assets whose beneficial life depends upon the fact that how many kilometers they have been driven e.g. Buses, cars, trucks and rolling stock etc.
Global Method
Under this method, the value of the assets, irrespective of their nature is added together and depreciation is expensed at an median rate on aggregated value.
Choice of a Method
Aforesaid methods of depreciation tell that none is admittedly best or worst as each recipe has its own merits and demerits. Suitability of every recipe is relative and depends upon various factors. Most leading of these are the type of the asset and purpose of depreciation.
Straight line recipe suits to structure and lease etc.. Reducing installment recipe fits to machinery tool etc. And depletion recipe for wasting assets like mines. Quarries etc. However, the fundamental purpose is the basic determinants of the propriety of a depreciation method. leading purpose include of true reporting of accounts, tax benefits, comparative stock cost, financial flexibility, change and expansion etc. For example. Depreciation fund recipe envisages that the number set aside for depreciation is to be invested surface the enterprise in exact securities. Similarly under insurance procedure method, the number so set aside is handed over to insurance company. If a enterprise is having working capital problems the advisability of these methods is questionable.
Of the above-mentioned methods (1) Fixed Installment and (2) Reducing Installment methods are most widely used.
Distinction between Fixed Installment recipe and Reducing Installment Method
Fixed Installment Method
1. The rate and number of depreciation remain the same each year.
2. Depreciation rate per cent is calculated on cost of asset each year.
3. At the end of its life the value of asset is reduced to zero or scrap value.
4. The older the asset, the larger the cost of its repairs. But the number of depreciation remains the same each year. Hence, the total of depreciation and repairs increases every year. This reduces annual behalf gradually.
5. Computation of depreciation comparatively easy and simple.
Reducing Installment Method
1. The rate remains the same, but the number of depreciation diminishes gradually.
2. Depreciation rate percent is calculated on book value of asset.
3. The value of asset is never reduced to zero at the end of its life.
4. The number of depreciation decreases gradually, while the cost of repairs increases.
So the total of depreciation and repairs remains more or less the same each "year. Hence, it causes little or no turn in annual profit/loss.
5. Depreciation can be computed without any difficulty, but it is not so easy and simple.
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