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Merits
It is considered more equitable than straight-line method.
It matches the service of the asset with the depreciation charge. When asset is more
efficient in the initial years, higher depreciation is charged compared to later years.
It recognizes the risk of obsolescence by charging the major part of depreciation in the
early years of the life of the asset.
It results in a better cash flow through tax deferral
Demerits
In subsequent years the original cost of the asset is completely lost sight of.
The asset can never be reduced to zero.
This method does not take into consideration the interest on capital invested in the asset.
This method requires elaborate book-keeping. The determination of correct rate of
depreciation is a complex task.
Straight Line Method
A method of depreciation in which a fixed amount is written off year on year, during the useful
life of the asset, to reduce the value of the asset to zero or its scrap value.
In this method, the cost of the asset is uniformly spread over the lifetime of the asset. This
method is also known as fixed installment method.
SLM Vs WDV
BASIS FOR
COMPARISO
N
SLM
WDV
Meaning
Calculation of
depreciation
Annual
depreciation
charge
Value of asset
BASIS FOR
COMPARISO
N
SLM
WDV
Amount of
depreciation
Initially lower
Initially higher
Impact of
repairs and
depreciation on
P&L A/c
Increasing trend
Remains constant
Appropriate for
Capital Expenditure:
Capital expenditure is that expenditure, the benefit of which is not fully consumed in one period
but spread over periods i.e. the benefits is expected to accrue for a long time. Any expenditure
which gives the following outcomes is a capital expenditure:
(i) Increases the capacity of an existing asset.
(ii) Increases the life of an existing asset.
(iii) Increases the earning capacity of the concern.
(iv) Results in the acquisition of a new asset.
(v) Decreases the cost of production.
Revenue Expenditure:
An expenditure which is consumed during the current period and which affects the income of the
current period is called revenue expenditure.
Following are the examples of revenue expenditure:
BASIS FOR
COMPARISO
N
CAPITAL EXPENDITURE
REVENUE
EXPENDITURE
Meaning
Expenses incurred in
regulating day to day
activities of the
business.
Term
Long Term
Short Term
Economic
benefits
Revenue expenditure
generates benefit for
the current year only.
Shown in
Income Statement
Nature
Revenue expenditure
occurs frequently.
Benefit
Only in current
accounting year