Question

What do you think is thebest method used in the calculation of depreciation? Why is that? at least 4 pages please.

Answer 1

Straight Line Method is the best method to calculate depreciation, under this method, an equal amount is provided each year for depreciation of each asset until the asset has been written down to nil or its scrap value at the end of
the estimated life of the asset.

The name of this method is derived from the fact if the successive annual depreciation over the life of the asset are plotted on a graph, the result will be a straight line with a slope equal to the armual depreciation. This method
is also called ‘Fixed Installment Method’ because a uniform amount of depreciation is
charge each year. The formula of the annual depreciation under the method is

D=C-S/n

Where,
D = Annual depreciation
C = Cost of the asset
S = Salvage or scrap value
n = Estimated life of years.

This method can be recommended only when the following conditions are
satisfied.
a) The asset is expected to render an uniform service through out its
estimated useful hfe'^.
b) Annual repairs and maintenance costs are assumed to remain constant
over its life^°.
c) The asset is expected to earn an equal amount of revenue each year
throughout its life.
d) The amount of depreciation is a function of time only.

Below are the reasons why this is the best method

1) This method is not only simple to understand but also easy to calculate.
2) The book value of an asset can be fully written off
3) The life of the certain assets sometimes depend on contracts like
leasehold property, patents, trade marks etc. In such case this method is
very much appropriate.
4) Effective life of an assets, scrap value, repairs and maintenance cost,
rate of interest etc. cannot be measured with certainty. So, no single
method can weight all the factors at a time with equal importance for
fixing the amount of depreciation. From this view point, this method
appears most reasonable as some favourable impact of some factors are
offset by unfavourable effects of others.