Question

Describe the three most common methods of computing depreciation for fixed assets and the factors used in calculating depreciation

Answer 1

The three most common methods are:

Straight line method:

This is the method where ( Cost-salvage value )of the asset is distributed over the useful life of the asset. In this method cost is distributed equally over the useful life and allocation of Depreciation expense is made equally.

Factors used: Estimation of useful life of the asset, so that the cost of the asset can be allocated accordingly.

Salvage value i.e the residual value of the asset must be value to be near or almost equal to fair value.

Written down value method (Declining method):

In this method the cost of the asset is allocated over the no.of years in such a way that the cost of asset keeps on diminishing. It is useful method where the asset involves huge costs in terms of repair in the later years of use.

Factors used: Estimates regarding the rate at which value of the asset is to be reduced is to be made.

Sum of the digits method:

In this case the cost of the asset is allocated based on the sum total of no.of years, then a fraction is arrived at based on which the cost of the asset is allocated.

Factors used: Life of the asset is to be estimated accurately because it is leads to the calculation of fraction base which is the basis of allocation of cost of asset.

E.g Life of asset 5 yrs

Therefore base=1+2+3+4+5=15

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