0 evaluări0% au considerat acest document util (0 voturi)

7 vizualizări4 paginixw

May 15, 2013

© Attribution Non-Commercial (BY-NC)

DOCX, PDF, TXT sau citiți online pe Scribd

xw

Attribution Non-Commercial (BY-NC)

0 evaluări0% au considerat acest document util (0 voturi)

7 vizualizări4 paginixw

Attribution Non-Commercial (BY-NC)

Sunteți pe pagina 1din 4

0 INTRODUCTION According to the Microsoft Encarta (2009), Depreciation is defined as an accounting process of allocating in a systematic and rational manner the cost of a capital asset over the period of its useful life. There are four main methods of calculating depreciation namely: the straight line, reducing balance sum of digits and sinking funds methods. The choice of the method to use will be dependent on the stakeholders as to when they would want to receive the benefits from the asset. One of the methods of depreciation is the straight line method which starts by estimating the number of years of use of the asset then divide the cost by the estimated number of years to get the depreciation charge each year. 2.0TERMS OF REFERENCE This assignment was requested by our Building Economics lecturer Mr. Mfula, to highlight more on one of the methods of depreciation known as straight line method of depreciation outlining the purpose of this method and give recommendation pertaining to the best method of depreciation based on the comparison of other depreciation methods. 3.0 PROCEDURE All the information pertaining to this particular topic was obtained through the internet and thorough reading from various books and articles. 4.0 MAIN BODY 4.1 STRAIGHT LINE DEPRECIATION DEFINED A method of calculating the depreciation of an asset which assumes the asset will lose an equal amount of value each year. Straight line method depreciates cost evenly throughout the useful life of the fixed asset. 4.2 APPLICATION OF STRAIGHT LINE DEPRECIATION The Straight-line Method reduces the Net-Book value of an asset by the same amount each period. This amount is determined by dividing the total value of said asset by some number of periods, and then subtracted from the balance at the end of each period e.g. 5 years. And thus it is divided evenly during the years meaning the same charge applied to the asset each year during its life time.It is also an accounting way of measuring the wear and tear on the fixed assets.

STRAIGHT LINE METHOD IS CALCULATED AS FOLLOWS:

Depreciation per annum = (Original cost Residual value) / useful life Book value = original cost accumulated depreciation

ESB 300

Page 1

STRAIGHT LINE DEPRECIATION Book value at the end of year becomes book value at the beginning of next year. The asset is depreciated until the book value equals scrap value. Book value at Depreciation Accumulated Book value at beginning of year expense depreciation end of year $3,000 $14,000 $17,000 (original cost) $3,000 $14,000 $3,000 $6,000 $11,000 $11,000 $3,000 $9,000 $8,000 $8,000 $3,000 $12,000 $5,000 $5,000 $3,000 $15,000 $2,000 (scrap value)

4.3 PURPOSE OF STRAIGHT LINE DEPRECIATION The straight line method allows the company to determine the value of the asset as they age. It allows the company to know how much they can sell an asset during its life time. Used to determine the net value of the assets in a firm. Depreciation is an expense which is subtracted from the gross profit and hence it helps to know the actual or current assets of the firm. Since it helps to know the actual value of the current assets, it will assist the company to determine whether the asset is worth keeping or not. This method will help the company to make a decision whether to its valuable to keep an asset or not.

4.4 EXAMPLES OF STRAIGHT LINE METHOD OF DEPRECIATION EXAMPLE ONE. 3.0 DEPRECIATION CALCULATION WITHOUT SALVAGE VALUE To calculate depreciation expense on an asset without a salvage value the cost is divided by the life. Annual depreciation charge = cost of an asset /useful life (assuming the residual value is zero) Example: Equipment is purchased for K 750,000. The expected life is 5 years. Calculation of the annual depreciation as follows: 750,000 / 5 = K 150,000 Each year for 5 years K150 000 would be expensed. At the end of 5 years the book value of the asset would be zero.

ESB 300

Page 2

STRAIGHT LINE DEPRECIATION EXAMPLE TWO A company purchases a new machine for 75,000 on 1 January 2011. It is estimated that the machine will have a residual value of 10,000 and a useful economic life of five years. The business has an accounting year end of 31 December. Straight line method depreciates cost evenly throughout the useful life of an asset. Straight line depreciation is calculated as follows: Calculation of the annual depreciation as follows: Annual depreciation charge = (Cost of an asset Residual values) / useful life (years) So the calculation is: A.D.C = (75,000 - 10,000) / 5 Annual Depreciation Charge = 13,000 In the accounts of the business a depreciation charge of 13,000 will be expensed in the profit and loss account for each of the five years of the asset's useful economic life. 5.0 RECOMMENDATION The purpose of depreciation is to spread the total cost of a fixed asset over the periods in which it is to be used. However the choice of the method should be that which allocates cost to each period in accordance with the proportion of the overall economic benefit from using the fixed asset that was expended during that period. Therefore the reducing balance method is the best of all the methods of depreciation. This is because it allows the stake holders to obtain the benefits in the early years of the assets life. Moreover, unlike the other methods. The reducing balance method reduces the already consumed value from the total assets value in order to have an accurate charge for the accounting period that follows. In practice the assets has high depreciation in the early years and low running and maintenance costs. It also follows that as an asset ages, Depreciation reduces where as running and maintenance costs increase there by reducing the expenses on the assets but depreciation and running costs together with maintenance cannot be classified as the same in that running costs and maintenance are expensed on a day to day basis where as depreciation is expensed over the year. 6.0 CONLUSION In this context, Four main methods of calculating depreciation have been expounded these methods include the straight line, reducing balance, sum of digits and sinking funds methods. Vivid explanation was made about how to apply the straight line method further defining what it is and how it is applied to help companies to determine the value of the current assets.

ESB 300 Page 3

ESB 300

Page 4

## Mult mai mult decât documente.

Descoperiți tot ce are Scribd de oferit, inclusiv cărți și cărți audio de la editori majori.

Anulați oricând.