Question
Write short-note on : $(A)$ Equal Instalment Method
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Answer
$(1)$ Procedure to determine the amount of depreciation : Under this method, to determinethe amount of depreciation, total depreciable amount is determined by deducting estimatedscrap value from the cost price of an asset. By dividing depreciable amount with thetotal years of estimated life of an asset, the arrived amount is called as annual amountof depreciation. The annual amount of depreciation can be obtained with the help of the following formula:
$(2)$ Speciality: $(1)$ This is very simple and popular used method. $(2)$ Due to cost priceof asset we should decide amount of depreciation. $(3)$ The amount of depreciation remainsidentical every year. $(4)$ The graph of depreciation of each year remains in horizontalline.
$(3)$ Advantages : $(1)$ This method is very simple to understand. $(2)$ This method is verysimple in the view point of calculating. $(3)$ The amount of depreciation remains identicalevery year, no frequent computation of depreciation is required. $(4)$ At the end of usefullife of asset its scrap value should be taken out. $(5)$ At the end of life of asset its fullyamount is considered as depreciation amount and that amount is upto zero or scrap value.
$(4)$ Disadvantages: $(1)$ In this method the value of depreciation remains same when theusage of asset reduce its value. $(2)$ Due to continuous purchasing and selling of an assetmakes difficult in calculation. $(3)$ Under this method interest on capital is ignored. $(4)$ inthis method no appropriate balance is maintained between depreciation and maintenanceexpense.
$(5)$ Appropriate : This method is appropriate for those assets, whose useful estimated lifecan be determined very easily e.g, leasehold properties, copyright, patent, trade mark etc.
| Annual amount of depreciation $(D) =\frac{C-S}{N}$ | |
| Rate of depreciation $(R) =\frac{D}{C} \times 100$ | |
| Annual amount of depreciation $(D) = \frac{C \times R}{100}$ | |
| Where, $D =$ Annual depreciation | $N =$ No. of years of useful life |
| $C =$ Cost price | $R =$ Rate of depreciation. |
| $S =$ Scrap value |
$(3)$ Advantages : $(1)$ This method is very simple to understand. $(2)$ This method is verysimple in the view point of calculating. $(3)$ The amount of depreciation remains identicalevery year, no frequent computation of depreciation is required. $(4)$ At the end of usefullife of asset its scrap value should be taken out. $(5)$ At the end of life of asset its fullyamount is considered as depreciation amount and that amount is upto zero or scrap value.
$(4)$ Disadvantages: $(1)$ In this method the value of depreciation remains same when theusage of asset reduce its value. $(2)$ Due to continuous purchasing and selling of an assetmakes difficult in calculation. $(3)$ Under this method interest on capital is ignored. $(4)$ inthis method no appropriate balance is maintained between depreciation and maintenanceexpense.
$(5)$ Appropriate : This method is appropriate for those assets, whose useful estimated lifecan be determined very easily e.g, leasehold properties, copyright, patent, trade mark etc.
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