Академический Документы
Профессиональный Документы
Культура Документы
B. Reasons of Depreciation
1. Wear and Tear of the Asset:
The long term assets are becoming less efficient and poor quality in
operations due to the continuous usage of the asset.
2. Exhaustion:
Nothing will be remaining due to the continuous extraction of resources.
The resources in the oil wells, mine fields will become nothing due to
continuous extraction should be replaced by new exploration. To invest
on the new exploration in order to have continuous exploration which
requires the depreciation as a charge against the revenues of the fields.
Example, Oil & Natural Gas Corporation Ltd. (ONGC) indulges in the
process of new oil exploration projects through research projects. Then
the new projects should be identified and invested by huge initial
investment outlay through the current revenues out of the existing
projects on account of replacement due to depletion of resources.
3. To Face Technological Obsolescence:
To replace the old machinery with new machinery before the expiry of
the economic life period of the asset in order to maintain the efficiency
and economy of the asset. The type writer was replaced by the electronic
typewriter during the yester periods of office automation. To replace the
old type writer which is not efficient as well as economical, should be
replaced by the new electronic typewriter through the depreciation charge
on the old one.
4. Accident:
The value of the asset mainly depends upon the efficiency and economy;
which gets affected due to the accident.
Merits
1. Simple and easy to calculate.
2. Original cost of asset reduced up to Scrap Value at the end of
estimated life.
3. Estimated useful life of the asset can be estimated under this
method.
Demerits
1. It does not consider intensity of use of assets.
2. It ignores any additions or opportunity cost while calculating
depreciations.
3. It ignores effective utilization of fixed assets, it becomes
difficult to calculate correct depreciation rate.
4. Under the assumption of constant charges of maintenance of
Merits
1. This method is accepted by Income Tax Authorities.
2. Impact of obsolescence will be reduced at minimum level.
3. Fresh calculation is not required when additions are made.
4. Under this method the depreciation amount is gradually
decreasing and it will affect the smoothing out of periodic profit.
Demerits
1. Residual Value of the asset cannot be correctly estimated.
2. It ignores interest on investment on opportunity cost which will
lead to difficulty while determining the rate of depreciation.
3. It is difficult to ascertain the true profit because revenue
contribution of the asset are not constant.
4
3. Annuity Method
This method is most suitable for a firm where capital is invested in
the least hold properties. Under this method, while calculating the
amount of depreciation, a fixed amount of depreciation is charged for
every year of the estimated useful life of the asset in such a way that at a
fixed rate of interest is calculated on the same amount had been invested
in some other form of capital investment. In other words, depreciation is
charged for every year refers to interest losing or reduction in the original
cost of the fixed assets. Under the annuity method where the loss of
interest is due to the investment made in the form of an asset is
considered while calculating the depreciation. The amount of
depreciation is calculated with the help of an Annuity Table.
Example
Example
Merits
1. Same as WDV method
Demerits
1. SYD depreciation method might be more confusing and harder
to compute compare to the straight line one
2. Incorrect estimated useful life can lead to incorrect depreciation
Example
Source
1. dosen.narotama.ac.id
2. bitsvizagmba.com
10