10 Types of Depreciation Methods

Depreciation Methods                      

                      Depreciation is a process where permanent continuously and gradually the book value of the fixed asset is decreased over a period of time from one period to another period. 

                      Different types of depreciation are as follows,

1.     Straight Line Method:

                   Under this method a fixed amount or percentage of the asset is written off every year. The amount will remain constant throughout the life of the asset. It can be basically calculated by following formulas

Depreciation = Cost of Asset – Scrap Value of Asset

                                                   Life of an Asset

If the depreciation percentage is directly given it is not necessary to use the above formula as it can be calculated by following formula

Depreciation = Cost Price of Asset X Percentage of Depreciation

2.   Written Down Value: 

                     Under this method a fixed percentage is fixed and is multiplied with the value of the asset very year. The depreciation amount every year varies with the decrease in the value of the asset over the life of the asset. The depreciation amount decreases as the life of asset comes decreases. It is basically calculated by formula

Depreciation = Cost of Asset X Percentage of Depreciation

3.     Annuity Method: 

                     In this method the interest in acquisition of asset is calculated on the book value of the asset. Interest calculated is debited to the asset account and credited to interest account.

4.  Insurance Policy Method: 

              In this method where former investment are purchased under the latter an insurance policy for the required sum. A premium is paid every year. At the end of the period the insurance company will pay the agreed amount with which new asset can be purchased. The premium will be the annual depreciation and will be debited every year to the P&L A/c and credited to depreciation reserve account.

5. Revaluation Method: 

                   This method is used only in case of small items like cattle(livestock) or loose tools where it is too much to maintain an account of each single item. The amount of depreciation is written off is determined by comparing the value at the end of year with the value at the beginning.

6.  Depletion Method: 

               This method is used in case of mines, quarries etc where an estimate of total quantity of output likely to be available should be available. Depreciation is calculated per tonne of output.

7.  Depreciation Fund Method:

               When one writes off depreciation one makes sure that sufficient assets are retained in the business to replace the asset unless the proprietor draws out more than is warranted by the figure of his net profit. Depreciation Fund or rather investments made outside the business ensure that when replacement is due ready cash will be available.

8.  Sum of Digit Method:

                 Under this method , amount of depreciation to be written off each year is calculated by following formula
                                  Remaining Life of the asset                 X Cost of the Year
         Sum of all the digits of the life of the asset in the year

9.  Machine Hour Rate Method:
                     In this method the life of asset is estimated in hours used and an accurate record is kept of the number of hours of machine run and depreciation is calculated accordingly.

10. Repair Provision Method: 

                     This method means that to the cost of the asset , the amount expected to be spent o its repairs and maintenance throughout its life should be added and the sum be divide by its estimated life.