What is Depreciation?
When an asset is put to use, it is subject to varied degree of wear and tear, depending on the usage of asset. Because of this wear and tear, it’s value decreases over a period of time. This decrease in value of a tangible or physical asset is called depreciation.
Similar to depreciation, a decrease in value of an intangible asset is called amortization.
What are different Methods of Depreciation Charged on Fixed Assets?
There are different methods to arrive at depreciation of the assets. Accounting standards allow companies to choose different ways to calculate the depreciation of assets, which has been elaborated in detail.
There are four types of depreciation charge on Fixed Assets
- Straight Line Method (SLM)
- Written Down Value Method (WDV)
- Units of Production Method
- Sinking Fund Method
Straight Line Method (SLM)
This method is also known as original cost method or fixed instalment method. In this method of depreciation a fixed percentage is charged every year on the original cost of the asset. Say for example, there is a car costing 10,00,000 with an estimate/useful life of 8 year on 1st April 2017. The scrap value of the car is NIL. The depreciation rate charged for the car should be 12.5%
Written Down Value Method (WDV)
This method is also known as the reducing balance method or declining balance method. In this method depreciation is charged every year on the declining value of an asset.
Units of Production Method
In this method depreciation is calculated based on the number of units produced by an asset. It depends on how much the asset is used in production process, if the asset is utilized heavily during a short duration, to produce more number of units, then the asset stands to depreciate faster.
Sinking Fund method
Sinking fund method is a method of depreciation in which the value of depreciation is reinvested each year. This amount and the interest generated can be used to replace the asset at the end of useful life of asset.
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