Saturday, July 27, 2013

What Is Fixed Installment Method Of Depreciation?

Meaning Of Depreciation
The goods and services provides to customers are obtained through the utilization of fixed assets during the operation process for a number of continuous accounting periods.As Fixed assets are used to generate periodic revenue,hence an appropriate amount of cost related to the fixed  assets should be charged as an expense against the revenue generated by the use of fixed assets. The potion of the cost of fixed assets charged to profit &loss account during a particular accounting period is termed as depreciation.

The term depreciation denotes decrease in the value of asset but in terms of accounting it is referred as decrease in book value of assets. Depreciation is a  permanent and continuous decrease in the book value of fixed assets due to use,effluxion of time,obsolescence etc.its is treated as non -cash expenditure.

Fixed Installment Method
Under this method deprecation can be calculated as follows:
1-when the assets has no residual value:
Each year depreciation = original cost of asset / number of years of estimated life of the asset.
2-when the assets has residual value:
Each Year Depreciation=(original cost of the asset-its estimated residual value)/number of years of estimated life of the asset.

Depreciation calculated according to the fixed installment method  is charged every year and at the end of the life of the asset,the amount of asset become zero.under this method every year amount of depreciation remains the same.

Merits:
1-it is very simple to calculate depreciation.
2-it is suitable in case of those assets whose service remain uniform in every year.,e.g.,furniture and fixtures.

Demerits:
1-value of asset goes on decreasing but the amount of depreciation remains the same every year.

It is known by following names also:
1- straight line method 2-original cost method
3-equal investment method 4-simple method of depreciation.

If you want to calculate asset with residual value then you can go through this link:
http://www.formuladirectory.com/user/formula/348
If you want to calculate asset without residual value then you can go through this link:
http://www.formuladirectory.com/user/formula/349