Depreciation | Fixed Installment Method | Straight Line Method
Arjun EP
Depreciation
Depreciation is taken from Latin word ‘Depretium’. De means to decrease and pretium means price.
Therefore, depreciation means decrease in price of asset.
Depreciation is charged on tangible assets except land gold biscuits.
Tangible assets are depreciated but intangible assets are written off or amortized.
Examples of tangible assets are machines, plants, furniture, buildings, computers, vehicles, equipment etc.
Examples of intangible assets are patents, trademarks, copyrights, goodwill etc.
Depreciation reduces profit of an organization.
It is non-cash expenses.
It is debited in profit and loss account.
Methods of Depreciation
There are different methods to calculate depreciation on tangible assets.
Depreciation is charged according to nature of assets.
Some major depreciation methods are given below:
(A) Based on allocation of expired deferred cost
On the basis of time:
- Fixed installment method
- Diminishing balance method
- Double decline method
- Sum of year’s digit method
On the basis of use:
- Machine hour method
- Production unit method
- Mileage method
(B) Based on capital recover and maintenance
- Sinking/Depreciation fund method
- Insurance policy method
- Annuity method
(C) Based on special method
- Revaluation method
- Depletion method
- Inventory depreciation method
Fixed Installment Method | Straight Line Method
Fixed installment method is also known as straight line method, original value method and original cost method.
Under this method, depreciation is charged on fixed asset equally each year.
Depreciation is calculated on either percentage basis or life of asset basis.
There are two methods for accounting treatment.
One is without opening provision for Depreciation account and other with opening provision for depreciation account.
(A) When depreciation rate is given
Annual depreciation
Depn = (Purchase value + Transportation + Installation charge + Erection charge – Scrap) x (% ÷ 100)
(B) When depreciation rate is not given
Annual depreciation
Depn = (Purchase value + Transportation + Installation charge + Erection charge – Scrap) ÷ Life
Net value = Purchase value + Transportation + Installation charge + Erection charge – Scrap
Keep in Mind (KIM)
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Net value = Purchase value + Transportation + Installation charge + Erection charge – Scrap |
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Cost value = Purchase value + Transportation + Installation charge + Erection charge |
Advantages of fixed installment method
The main advantages of fixed installment method are following:
· This method is simple to calculate and easy to understand.
· Depreciation amount is equal to every year.
· Value of asset is shown in balance sheet every year.
· Output does not require calculating depreciation.
Disadvantage of fixed installment method
The main disadvantages of fixed installment method are following:
· Value of used assets decrease every year but depreciation is charged on original value.
· It ignores interest on capital that invested in assets.
· Under this method, value of assets becomes zero but some assets never become zero.
· Some assets are operated more than one shift but depreciation is charges as single shift.
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Accounting Equation |
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Basic Journal Entries in Nepali |
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Basic Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cash Book |
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Trial Balance & Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Final Accounts: Class 11 |
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Adjustment in Final Accounts |
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Capital and Revenue |
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Single Entry System |
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Non-Trading Concern |
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Government Accounting |
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Goswara Voucher (Journal Voucher) |
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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country
PROBLEM: 1A
BK Textile Company purchased a machine on 1 January 2018 cost $/₹/Rs 450,000. Company paid $30,000 for transportation and $20,000 for installation. Company charges depreciation on fixed installation methods 10% p.a. The company closes its accounts as per calendar year. The company sold this machine on 31 December 2020 for $300,000.
Required: from 2018 to 2020
(a) Annual depreciation; (b) Journal entries; (c) Machine account; (e) Depreciation account
[Answer: Depreciation = $50,000 p.a.; Loss on sales = $50,000]
Solution:
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Net value |
= Purchase value + Transportation + Installation charge – Scrap |
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= 450,000 + 30,000 + 20,000 – Nil |
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= $500,000 |
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Annual depreciation |
= Net value x (Given % ÷ 100) |
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= 500,000 x (10 ÷ 100) |
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= $50,000 |
Journal Entries
In the book of Butwal Textile Company
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Date |
Particulars |
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LF |
Amount Dr |
Amount Cr |
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2018 |
Asset purchased, transport and installation paid |
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1 Jan |
Machinery account |
Dr |
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500,000 |
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To Bank account |
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500,000 |
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(Being- machinery purchased, transport and installment paid |
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31 Dec 18 |
Depreciation charged on machine |
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Depreciation account |
Dr |
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50,000 |
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To Machinery account |
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50,000 |
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(Being- depreciation charged on machinery) |
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31 Dec 18 |
Depreciation transfer to profit and loss |
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Profit and loss account |
Dr |
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50,000 |
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To Depreciation account |
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50,000 |
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(Being- depreciation transferred to P&L account) |
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2019 |
Depreciation charged on machine |
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31 Dec 19 |
Depreciation account |
Dr |
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50,000 |
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To Machinery account |
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50,000 |
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(Being- depreciation charged on machinery) |
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31 Dec 19 |
Depreciation transfer to profit and loss |
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Profit and loss account |
Dr |
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50,000 |
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To Depreciation account |
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50,000 |
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(Being- depreciation transferred to P&L account) |
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2020 |
Depreciation charged on machine |
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31 Dec 20 |
Depreciation account |
Dr |
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50,000 |
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To Machinery account |
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50,000 |
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(Being- depreciation charged on machinery) |
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31 Dec 20 |
Depreciation transfer to profit and loss |
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Profit and loss account |
Dr |
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50,000 |
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To Depreciation account |
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50,000 |
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(Being- depreciation transferred to P&L account) |
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31 Dec 20 |
Sales of machine |
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Bank account |
Dr |
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300,000 |
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Profit and loss (loss) account |
Dr |
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50,000 |
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To Machinery account |
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350,000 |
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(Being- machinery sold at loss) |
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Machinery Account
In the book of BK Textile Company
For the year ended 31st December
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Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
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2018 |
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2018 |
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1 Jan |
To Bank account (M1) |
500,000 |
31 Dec |
By Depreciation A/c |
50,000 |
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31 Dec |
By Balance c/d |
450,000 |
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500,000 |
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500,000 |
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2019 |
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2019 |
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1 Jan |
To Balance b/d |
450,000 |
31 Dec |
By Depreciation A/c |
50,000 |
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31 Dec |
By Balance c/d |
400,000 |
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450,000 |
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450,000 |
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2020 |
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2020 |
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1 Jan |
To Balance b/d |
400,000 |
31 Dec |
By Bank account (sold) |
300,000 |
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31 Dec |
By Depreciation A/c (on sales) |
50,000 |
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31 Dec |
By P&L account (loss) |
50,000 |
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400,000 |
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400,000 |
Depreciation Account
For the year ended 31st December
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Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
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2018 |
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2018 |
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1 Jan |
To Machinery account |
50,000 |
31 Dec |
By Profit and loss |
50,000 |
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50,000 |
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50,000 |
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2019 |
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2019 |
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1 Jan |
To Machinery account |
50,000 |
31 Dec |
By Profit and loss |
50,000 |
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50,000 |
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50,000 |
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2020 |
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2020 |
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1 Jan |
To Machinery account |
50,000 |
31 Dec |
By Profit and loss |
50,000 |
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50,000 |
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50,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country
PROBLEM: 1B
On 1st October 2018, ABC Company purchased a machine for $875,000. It was estimated that after 10 years, its break-up value would be $25,000. On 1st January 2019, company purchased second machine for $140,000 and scrap value $7,000. On 1st July 2020, company purchased another machine for $70,000 with residual value $3,000.
The life of all the machinery was valued 10 years. Company charges depreciation under fixed installment method. Accounts are closed on 31st December each year.
Required: Machinery account for three years
[Answer: Depn per year: M1 = $85,000; M2 = $13,300; M3 = $6,700;
Depn: 2018 = $21,250; 2019 = $98,300; 2020 = $101,650;
Balance in 2020 = $863,800;
Solution:
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Depreciation per year |
= (Purchase value – Scrap value) ÷ Life |
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Machine 1 |
= (875,000 – 25,000) ÷ 10 years |
= $85,000 |
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Machine 2 |
= (140,000 – 7,000) ÷ 10 years |
= $13,300 |
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Machine 3 |
= (70,000 – 3,000) ÷ 10 years |
= $6,700 |
Given and working note:
Depreciation on SLM
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Particulars |
Date |
Assets |
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Old |
New |
Year |
M1 = 875,000 |
M2 = 140,000 |
M3 = 70,000 |
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Purchase |
1 Oct |
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2018 |
875,000 |
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Depreciation |
31 Dec |
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2018 |
21,250 |
(3m) |
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Book value/Purchase |
1 Jan |
1 Jan |
2019 |
853,750 |
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140,000 |
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Depreciation |
31 Dec |
31 Dec |
2019 |
85,000 |
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13,300 |
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Book value/Purchase |
1 Jan |
1 July |
2020 |
768,750 |
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126,700 |
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70,000 |
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Depreciation |
30 Sep |
31 Dec |
2020 |
85,000 |
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13,300 |
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3,350 |
(6m) |
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Balance |
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683,750 |
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113,400 |
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66,650 |
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Machinery Account
For the year ended 31st December
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Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
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2018 |
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2018 |
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1 Oct |
To Bank account (M1) |
875,000 |
31 Dec 31 Dec |
By Depreciation account By Balance c/d |
21,250 853,750 |
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875,000 |
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875,000 |
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2019 |
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2019 |
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1 Jan 1 Jan |
To Balance b/d To Bank account (M2) |
853,750 140,000 |
31 Dec 31 Dec |
By Depreciation A/c (M1 + M2) By Balance c/d |
98,300 895,450 |
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993,750 |
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993,750 |
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2020 |
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2020 |
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1 Jan 1 July |
To Balance b/d To Bank account (M3) |
895,450 70,000 |
31 Dec 31 Dec |
By Depn A/c (M1+M2+M3) By Balance c/d |
101,650 863,800 |
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965,450 |
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965,450 |
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PROBLEMS AND ANSWERS OF DEPRECIATION |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country
PROBLEM: 1A
NP Agro (P) Ltd purchased a machine on 1st January 2018 for $90,000. Transportation and installation paid $10,000. The scrap value of machine was estimated $10,000 at the end of its three year life. The company charged straight-line method for depreciation. The company closes its accounts on December end each year.
Required: (a) Journal entry for first three years; (b) Machine account from 2018−2020; (c) Depreciation account
[Answer: Depreciation = $30,000 per year; Balance = $10,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country
PROBLEM: 2B Additional purchase
AM Traders purchased delivery van for $600,000 on 1st January 2018. Traders follow straight-line depreciation policy for its fixed assets @ 20% per annum. It purchased mini truck for $800,000 on 1st July 2019. The financial year of the company ends at 31st December each year.
Required: Delivery van account for first three years
[Answer: Depreciation: in 2018 = $120,000; in 2018 = (120,000 + 80,000);
In 2020 (120,000 + 160,000); Balance on 31 Dec 2020 = $800,000]
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