Features Depreciation
Depreciation has the following characteristics:
(1) Depreciation is charged in the case of fixed assets only, such as construction, equipment and machinery, furniture, etc. "This is not the case, the depreciation of current assets such as inventories, accounts receivable, credits, etc.
(2) Depreciation fall from eternal causes gradual and continuous asset value
(3) Depreciation is calculated to the last day of work asActivities in the life
(4) The attenuation caused by the use of property, in some cases, however, the depreciation can occur even if the goods are not used, for example, land ownership, patent, law-d "author, etc.
(5) Depreciation of the revenue of an accounting period calculated.
(6) depreciation does not depend on fluctuations in the market value of assets
(7) The depreciation charge for a billing period can not be accurately determined, it must be estimated. Insome cases, however, can be precisely determined, for example, land ownership, patent, copyright, etc.
(8), the depreciation of an asset amount not exceeding the cost of capital (cost less scrap value).
Fundamental factors to determine that the depreciation
(1) the cost of capital, the purchase price as costs for transportation and installation;
(2) Estimated cost of repairs during the useful life;
(3) Estimated useful life of assetsafter which it will be rejected;
(4) or the estimated residual scrap;
Investing (5) The return on invested capital, the amount involved was to buy the assets invested in some interest from other investments, which would have earned;
(6) the possibility of obsolescence.
Fixed deposit or acquisition or in a straight line approach, reduction and the amortization method
In this method, depreciation is calculated on the cost of the goods. It is calculated based on the book value. Task.The book value of assets will be made by deducting the amortization of costs. The book value of assets decreased gradually due to the depreciation. As the percent of depreciation is used to reduce the balance of activities. This method is written as depreciation or reduce the payment method or a method of value.
Advantages and disadvantages.
Accelerated depreciation, is not only fair, depreciation and amortization to income, but also fairly common.the effect of depreciation and repair (ie, an increase in depreciation, but later the heavier repairs over the years.) gains and losses on asset life. The disposal of the majority of the costs in the first years the effects of aging minimized. It is also useful for the management of accelerated depreciation will reduce taxable income and then lowered taxes cash.
Accelerated depreciation methods
The numbers of the year (SYD). This method of depreciationaccelerated depreciation, so that the amount found in the early stages of the life cycle of an asset are higher than those recorded in recent times. The SYD is on the expected useful life of an asset over the years, the allocation of consecutive numbers, then each year and a total of these figures. N For the years
SYD = 1 + 2 + 3 + 4 + ... + N
Annuity
The method is based on the time value (interest) money, and therefore refers to the actual cost of using a long lifethe same amount of assets in this respect and lost interest in the acquisition of real estate investing. Under this method, such as depreciation each year is written off, and falls under the flow of capital account, with interest on the value, stop the activity at the end of his life. Therefore, the amount of depreciation is broken every year the same, but the interest decreases each year.
The annual depreciation is amortized using the method of your pensionfound from the tables of the pension
Method of depreciation or sinking fund method
Under this procedure, a fixed amount is charged as depreciation each year. Strives to provide the needed liquidity to lump sum on the resignation of a long-term activities are charged annually and within easy reach by investing a fixed amount of securities is. These securities bear interest at a fixed rate and fixed the same share reinvested depreciation is allowed to accumulateCompound interest. The method of sinking fund account is therefore likely that the interest arose in determining the annual depreciation and invest the same, because compound interest to the cost of depreciable assets at the end of his life. Obviously, the payment of fixed annual depreciation here is smaller than the linear method. Its size is on the life of the goods and interest rates. In addition to the bow andInterest rate, the lower annual depreciation cost can be depreciated by Rs.
Deficit of depreciation method
Accumulated depreciation method assumes a constant rate of return on all investments in securities identical periods. This is not the case in this dynamic world in which prices vary from time to time. Any change in the yield disrupts the first regular allowance for depreciation and renewal of the same behavior. In addition, rarely the amount realized from the sale of securityconsistent with its cost, due to changes, both irregular and can be significant. It may be necessary to a great divide between the have and in cash.
Insurance Policy Method
This method provides the liquidity necessary efforts for the closure of a given asset in return for a regular contribution (premium). Under the Company adopted a policy of insurance of the CAP, with an insurance company agrees to pay as soon as a certain sum if 'Shopping, pay a fixed amount of premiums after regular intervals. The merchant handles the regular payments of accrued depreciation, amortization and gains and losses. In this case, the depreciation is charged at the end of the year, while the premium is paid at the beginning of the year. At maturity, the insurance pays the political price is usually sufficient to replace the set in their retirement years. Usually, the result for the amount of back pay less than the sum of the premiums for the policyInterest.
Method of revaluation
With this system, each year the asset is assessed and the value is compared with the beginning of the year. The case is regarded as the depreciation. Let us assume that if the value of the instruments was the beginning of the year, Rs 8000, the year worth of instruments of RS. 6000 have been purchased, and at the end of the year at this assessment, which amounted to 11,000 Rs. Amortization for the year: 8,000 + 6,000-11,000 = rs. 3000th This method isUseful for the collection of amortization of animals and tools in bulk.
Method of exhaustion
Natural resources are physical activity, such as deposits of minerals, oil and gas and timber. These natural resources are exhausted by the operation. In some cases, the reduction of deposits of natural growth or development of additional deposits were to be compensated.
The cost of natural resources is the price of the purchase price plus amounts paid for the development of this property paid toon cleaner production.
Exhaustion better not regularly calculated by year. Instead, it is better to calculate the cost per unit, then multiply the unit cost of units produced in that year.
Machine at a price
According to this method is estimated the total number of hours in a car of the actual length, then the cost of the machine is divided by the expected number of hours of life, which gives the velocityfor now. The annual depreciation is calculated this percentage multiplied by the number of hours the machine actually works in a year.
Mileage Method
This method is only for those whose lives are used to the fact that the number of miles have been driven out, for example, buses, cars, trucks and vehicles, etc.
Global Method
Under this method, the value of the property, regardless of its type and has the depreciation is charged at an average rateSet on the total value.
The choice of method
Depreciation methods shown above, is absolutely no better or worse than each method has its advantages and disadvantages. The appropriateness of each method is relative and depends on several factors. More important are the type of activity and purpose of depreciation.
Especially suitable method is suitable for buildings and homes, etc.. Reduction method of payment is wasted in plant and machinery, etc. and the method of exhaustionActivities such as mining. Career, etc. However, the basic objective of the fundamental factors for the attractiveness of a depreciation method. Objective important to understand the relationship of accounting, tax benefits, the comparative cost of the products, financial flexibility, replacement and expansion investments, for example, etc.. Fund expects that the method set aside the depreciation charge for the write-off of the company must be invested in certain securities. Even with the methods of insurance, the amount asPreliminary data to the insurance company. If a company has problems working capital on the appropriateness of these methods is questionable.
Among the above methods (1) set the date and (2) Reduce to mention the payment methods that are used most often.
Distinction between fixed payments and payment method, reducing method
Down payment
1. The speed and amount of depreciation remains the same every year.
2. Percent depreciation ratecalculates the cost of goods each year.
3. At the end of his life, the value of the asset is reduced to zero or the value of scrap metal.
4. The oldest active, plus the cost of the repair. But the amount of depreciation remains the same every year. Therefore, increasing the total depreciation and repairs per year. This reduces the annual earnings over time.
5. Depreciation, relatively easy and simple.
Reduce payment method
1. This rate remains the same, butthe amount of depreciation gradually.
2. Depreciation rate is calculated as a percentage of book value of assets.
3. Capital value is never reduced to zero by the end of his life.
4. The amount of depreciation gradually decreased, while the cost of repairs increases.
Thus, the total depreciation and repairs is more or less the same every year. "Therefore, it causes little or no change in annual profits / losses.
5. Depreciation can be calculated withoutDifficulties, but not so easy and simple.
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