The word deprecation lays its roots in the Latin word depretiare.‘de’means down and‘pretium’means price. So, nonfictional restatement of the word brings out the meaning as downfall in price. But, in ultramodern script, the use of the word deprecation is confined to fixed means only (except land).

Now, first we’ve to understand what deprecation actually means. We know, to carry on day to day operations, every organisation has to emplace multitudinous fixed means to use. Relatively obviously, no asset can perform with same capacity all throughout its life. It’ll face gradational wear and gash due to nonstop operation or perhaps because of remaining idle for so long. This results in reduction of effectiveness of the concerned asset. The miracle bandied over is generally nominated as deprecation. We’ve to keep in mind that as deprecation as a conception is important, it’s account is also important. There are colorful scientific styles of counting for deprecation. The most important of them are straight line system and written down Value system (as per your syllabus).

Deprecation is allocated so as to charge a fair proportion of the depreciable quantum in each account period during the anticipated useful life of the asset.

Straight line system

this system is the simplest way of calculating deprecation on fixed means. Under this system, the cost of purchase of the concerned fixed asset, the salvage value (scrap value) of the asset and duration of use are considered. This system is also known as original cost system, because, the rate of deprecation is applied on the original cost of the machine. To ascertain the quantum of deprecation to be allocated to an asset, the following formula is used
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Under this system, total deprecation of an asset is apportioned inversely along the duration of use. Suppose, total cost of an asset isRs. 1200 and it’s used by the organisation for 10 times. Let, the scrap value of the asset beRs. 200. So, the quantum of deprecation to be th allocated per time would be (1200-200)/ 10 = Rs. 100. So, at the end of the 10 time, the value of the asset would be fully lowered.
Hence, from the below map, we can see that the trend of deprecation follows a straight line. That’s why, the system bandied over is generally appertained as straight line system.

From the below map, we can see that the value of asset decreases at a constant rate. That’s why, the illustration is a over leaning straight line.

Though this system is simple to follow and regard for, but it isn’t fully logical. Because, in real life, no machine is inversely used all along its life. So, in real script, the quantum of deprecation would differ.

Written downvalue system

under this system, an asset is downgraded at a particular rate which is charged on the value of asset on st the 1 day of each fiscal time. So, unlike straight line system, quantum of deprecation would be different each time and it’ll gradationally drop. This system is more logical as the deprecation is charged on the effective value of the asset rather of its original cost. Suppose, cost of an asset isRs. 1000 and rate of deprecation is 10. So, for the first time, quantum of deprecation would be (1000 * 10) = Rs. 100. So, the written down value of the asset on the first day of coming fiscal time will beRs. 900. In this time, deprecation will be charged@ 10onRs. 900, viz 900 * 10 = Rs. 90. Hence, this process will continue until the value of the asset reaches zero.

PROVISION FOR DEPRECIATION

Now we will concentrate on the veritably important system of account for deprecation which is called “ provision for deprecation system”. Please remember that this isn’t a system of CALCULATING deprecation but a system of Account. In this system we prepare the asset account at cost, provision for deprecation account and a ministry disposal account. Let us bandy in detail. Under this system deprecation is independently recorded in provision for deprecation account. The fixed asset account appears at its original cost.

In the profit and loss regard current period’s deprecation is only recorded. In the balance distance fixed asset account is bared by abating the accumulated deprecation i.e. the deprecation till the balance distance date from the original cost.

Sum of Times of Digits Method

It’s variation of the “ Reducing Balance System”. In this case, the ansnual deprecation is calculated by multiplying the original cost of the asset less its estimated scrap value by the bit represented by
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The deprecation to be written of in the frst time will be10/55 of the cost of the asset less estimated scrap value; and the deprecation for the alternate time will be9/55 of the cost of asset less estimated scrap value and so on.
The system isn’t yet in vogue; and its advantages are the same as those of the Reducing Balance System.

Annuity Method

This is a system of deprecation which also takes into account the element of interest on capital disbursement and seeks to write of the value of the asset as well as the interest lost over the life of the asset. It assumes that the quantum laid out in acquiring asset, if invested away, would have earned interest which must be reckoned as part of the cost of asset. On that base, the quantum of deprecation to be annually handed in the accounts is ascertained from the Annuity Tables, to write of each time interest on the capital disbursement as well as part of the capital sum at a rate that the total of the capital sum and interest accruing thereon would be written of over the life of the asset.

Though the quantum written of annually is constant, the interest in the earlier times being lesser, only small quantum of the capital disbursement is written of. This proportion is reversed with the passage of time. This system is eminently suitable for jotting of the quantities paid for long plats which involve a considerable capital disbursement. It isn’t practicable to borrow this system for jotting of deprecation of factory and ministry on account of frequent changes in the value of similar means which would bear the recalculation of the quantum of deprecation to be written of annually.

Sinking Fund Method

Still, factory and outfit at the end of its efective life, it may not be judicious to leave in the quantum of deprecation set piecemeal annually, If a large sum of plutocrat is needed for relief of property. To guard this position, the quantum annually handed for deprecation may be placed to the credit of the Sinking Fund Account, and at the same time an original quantum may be invested in Government securities.

The interest on these securities, when entered, would bere-invested and the quantum thereof would be credited to the Sinking Fund Account. The quantum of periodic provision for deprecation in such a case is calculated after taking into account interest, that the quantities annually invested shall be earning over the period these will remain invested. When the asset is due for relief, the securities are vended and the new asset is bought with the proceeds of their trade. The book value of the old asset, at the time, is transferred to the Sinking Fund Account. Any quantum realised on trade of the old asset, as well as the proft or loss on trade of securities, is transferred to the Sinking Fund Account and it’s closed of by transfer of the balance of the Proft and Loss Account or General Reserve.