Define depreciation explain with straight line and deminishing balance method
Answers
Meaning of Depreciation
The monetary values of all tangible assets tend to reduce gradually over time due to factors like wear and tear. The meaning of depreciation, in very simple words, is the rate at which this value drops. Hence, it compares an asset’s current value with its original cost at the time of acquisition or purchase.
1] Straight Line Method
Straight line method is the simplest way to calculate depreciation. Under this mode, the amount of value reduced from the original cost of the asset remains constant for every accounting year. For example, if we assume the rate of depreciation for a car worth Rs. 10 lakhs to be constant at Rs. 25,000, then its value will reduce by Rs. 25,000 in every accounting year during the course of its useful life.
3] Written down value method
Also known as Diminishing Balance Method. Under this method, the percentage rate of depreciation remains fixed, but we have to reduce the asset’s value during every accounting year. The Income Tax Act, 1961 has prescribed this method for calculation of depreciation.