Accounting for Depreciation
Depreciation can be defined as the monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation. A decrease in an asset’s value may be caused by a number of other factors as well such as unfavorable market conditions, etc. Machinery, equipment, currency are some examples of assets that are likely to depreciate over a specific period of time. Opposite of depreciation is appreciation which is increase in the value of an asset over a period of time. Accounting estimates the decrease in value using the information regarding the useful life of the asset. This is useful for estimation of property value for taxation purposes like property tax etc. For such assets like real estate, market and economic conditions are likely to be crucial such as in cases of economic downturn.
Methods of Depreciation
Straight Line Method of calculating Depreciation
Under straight line method of depreciation an equal amount is written off every year during the working life on an asset so as to reduce the cost of the asset to NIL or to its residual value at the end of its useful life.
Straight line Depreciation = Cost of Asset –Scrap Value
This method of charging depreciation is recommended mostly for power generating units or for the assets where danger of obselence is low. The amount of depreciation remains same year to year. It is also known as fixed installment method or constant method.
Written Down Value Method
A fixed percentage of the diminishing value of the asset is written off each year so as to reduce the asset to its salvage value at the end of its life.
Depreciation Rate = 1/n [Residual Value × 100]
Cost of Asset
This method is highly recommended mainly for manufacturing units though it is recommended for most of the enterprises. Here the value of assets never comes to zero and it will be more suitable for assets, which requires more repairs with passage of time.
Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined. The consultants at Emirates Chartered Accountants Group assist the clients to adopt a suitable method for calculating the depreciation. Send us enquiry to email@example.com