Methods of charging Depreciation There are many methods of applying depreciation, some of the main methods are as follows: (1) Fixed Instalment Method / Straight Line Method (2) Written Down Value / Diminishing Balance Method (3) Annuity Method (4) Depreciation Fund Method (5) Insurance Policy Method (6) Revaluation Method (7) Depletion Unit or Production Unit Method (8) Machine Hour Method (9) The sum of the years Digits Method (10) The use or Mileage Method (11) Group Depreciation Method Here we will study only fixed installment method and amortizing method, which are most popular. Straight Line Method or Fixed Instalment Method There are many names of this method, such as— (i) Straight Line Method, (ii) Original Cost Method, (iii) Equal Instalment Method, (iv) Fixed Instalment Method. Fixed Instalment Method. Under this method, depreciation is calculated at a fixed percentage on the original cost of the asset every year. Obviously, there will be the same amount of depreciation each year. That is why it is called a fixed instalment or ‘prime cost’ method. If the depreciation is marked on the graph paper and all the points are joined then a straight line will be formed. That’s why it is called ‘straight line method’ or straight line method.

1. Methods of charging Depreciation
There are many methods of applying depreciation, some of the main methods are as
follows:
(1) Fixed Instalment Method / Straight Line Method
(2) Written Down Value / Diminishing Balance Method
(3) Annuity Method
(4) Depreciation Fund Method
(5) Insurance Policy Method
(6) Revaluation Method
(7) Depletion Unit or Production Unit Method
(8) Machine Hour Method
(9) The sum of the years Digits Method
(10) The use or Mileage Method
(11) Group Depreciation Method
Here we will study only fixed installment method and amortizing method, which are most
popular.
Straight Line Method or Fixed Instalment Method
There are many names of this method, such as—
(i) Straight Line Method,

2. (ii) Original Cost Method,
(iii) Equal Instalment Method,
(iv) Fixed Instalment Method. Fixed Instalment Method. Under this method, depreciation is
calculated at a fixed percentage on the original cost of the asset every year. Obviously, there
will be the same amount of depreciation each year. That is why it is called a fixed instalment
or ‘prime cost’ method. If the depreciation is marked on the graph paper and all the points
are joined then a straight line will be formed. That’s why it is called ‘straight line method’ or
straight line method.
Calculation of depreciation – (i) Under this method, the purchase price (i.e. original cost)
of the asset is subtracted from its scrap value or residual value and in the amount that
comes, the estimated useful life of the asset is Life-span is given away. The quotient is the
amount of depreciation.
(ii) If in question Original Cost or OC, Installation Charges (I/C) J Residual Value (Scrap) and
life of the asset are given, then

3. Whereas,
OC = Original Purchase Cost of the Asset
IC = Installation Charges , Overhauling Charges, repairs on second hand Machine, stamp
duty, carriage and Fight etc.
Scrap = Residual Value or salvage value at the end of life of machine
(iii) Interest when the asset has no residual value and the rate of depreciation is
(iv) Rate of Depreciation (On original cost =
Where R = Rate of Depreciation, D = Amount of Depreciation , C = Cost of Acquisition
For Example :

4. Example 1. A machine was purchased for ₹ 1,00,000. If the rate of depreciation is 20% then
the amount of depreciation will be 1,00,000 x 20 100 = ₹ 20,000 per year
Example 2. A machine was purchased for ₹ 1,00,000. Its estimated residual value is ₹
10,000 and its estimated life is 10 years, then the amount of depreciation will be calculated
as follows
1,00,000 – 10,000 / 10 = 90,000 / 10 = ₹ 9,000
Points to Remember
(1) According to this method, the amount of depreciation is same every year;
(2) When the amount of repairs on the asset increases in any year, the amount of total loss
also increases (ie, depreciation + repairs);
(3) the book value of the asset at the end of its life shall be nil; and
(4) If the rate of depreciation is ‘per annum’ or ‘annually’, then the months will also have to
be taken into account for computing the depreciation. If only the percentage is mentioned,
then one year’s depreciation should be worked out.
Merits of Fixed Instalment Method :
(1) It is a popular, old and simplest method of depreciation.
(2) In this the asset can be written down to nil or residual value.
(3) The amount of depreciation and the original cost of the asset can be ascertained by
looking at the balance sheet.
Demerits of Fixed Instalment Method — (1) The main drawback of this method is that
according to this method the amount of depreciation remains the same every year but in
practice it is seen that as the asset is used, its efficiency decreases. Consequently, the
amount of depreciation should also decrease.
(2) The cost of repairs is very high during the useful life of the asset but this is not taken into
account in this method.
(3) Under this method interest on the capital employed on the asset is not taken care of.
Suitability — This method is useful for those assets on which repair expenditure is very less
and whose life span is less, such as furniture, equipment etc.
Journal Entries

5. In this method the following journal entries are made
(1). For Purchase of Asset
Asset A/c Dr.
To Cash/Bank A/c
(Being asset purchase)
(2). Erection/Installation Expenses
Asset A/c Dr.
To cash/Bank A//Party’s A/c
(Being erection expenses charged to asset A/c
(3). For Depreciation
Depreciation A/c. Dr.
To Asset A/c
(Being depreciation on asset)
(4). For Charging Depreciation to profit & Loss A/c
Profit & Loss A/c Dr.
To Depreciation A/c
(Being Depreciation charges)
(5). For Sales Of Assets
Cash/Bank A/c Dr.
To Asset A/c
(Being Asset Sold)
(6). Fod loss on Realisation of Assets
Profit & Loss A/c Dr.
To Asset A/c
(Being loss charges to p&l)
(7) For Profit on Realisation of Assets
Assets A/c Dr.
To Profit & Loss A/c
(Being profit on sales )
(8) On sale of Scrap or Residual Asset
Cash/Bank A/c Dr.
To Asset A/c
(Being the sale price of scrap realised)
Write Down Value / Diminishing Balance Method

6. The Perpetual Method is also called the Reducing Balance Method or Written Down Value
Method [ Reducing Balance Method or Written Down Value (W.D.V.) Method ]. Under this
method, the amount of depreciation is calculated at a fixed rate every year on the
depreciating value of the asset. Thus, the rate of depreciation remains the same every year
but the amount of depreciation keeps on decreasing. This method is specially adopted for
the valuation of machines. Because, this method is used more for those assets which tend to
depreciate in value as they get older and repair and renewal expenses are more on them.
Formula for calculating the rate of depreciation:
Whereas,
R= rate of decline
N= number of years of life of the asset
S= residual value
C= cost of property
OC= original cost of purchase of the asset
Merits — (1) The most important advantage of this method is that under this the cost and
profit and loss account of repairs are equally charged every year.
(2) In this method, there is no difficulty in calculating depreciation for growth and expansion
of assets.

7. (3) This method has been recognised under the Income Tax Act.
Demerits — (1) In this method the value of property can never be brought down to zero.
(2) Determining the appropriate rate of depreciation in this method is also a difficult task.
(3) Due to unequal charges of depreciation for different years, the cost accounts do not give
correct information.
(4) In this, interest is not taken into consideration by investing capital in the property.
Difference Between Straight line Method and written down value Method : See in article
Frequently Asked Questions
Qs 1. Methods of charging depreciation formula
Ans. Some of the Method for Calculating Depreciation are :
(1) Fixed Instalment Method / Straight Line Method
(2) Written Down Value / Diminishing Balance Method
(3) Annuity Method
(4) Depreciation Fund Method etc..
Qs 2. Two methods of charging depreciation
Ans. Two Main methods are as follows :
(1) Fixed Instalment Method / Straight Line Method
(2) Written Down Value / Diminishing Balance Method
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