About Lesson
- The decrease in the value of any equipment due to the wearing and tearing over the time is called as depreciation.
- It represents the amount by which a farm resource decreases in value, as a result of cause other than a change in the general price of the item.
Methods of calculating depreciation
- Annual Revaluation:
- This is the yearly valuation of assets. This method implies estimating the market value of the asset in the beginning and the end year inventory and then taking the difference as depreciation.
- Straight line method:
- This method is easy, simply and usually most satisfactory for most various purposes.
- From this method, the annual depreciation of assets is computed by dividing the original cost of the assets less salvage value by the expected year of life.
D=OC-SV/EC
Where, D = Depreciation
OC = Original Cost
SV = Salvage value
EC = Expected Life
- This method is more useful for durable assets like building and fences that may require uniform maintenance during their lifetimes.
- Double declining balance method:
- Fixed rate depreciation is used every year and applied to the remaining value assets at the beginning of each year.
- It is important to note that salvage value is not subtracted from the original cost as in the various methods.
- Sum of the year digits or reducing fraction method:
- The following formula is used for calculating the annual depreciation
AD = F*AMD
Where,
AD = Annual Depreciation
F = Fraction
AMD = Amount to be depreciation
F = RM/SYM
Where,
F = Fraction for any year
RM = Year of remaining life at the beginning of account period
