different between fixed instalment method and redusing balance method of depreciation
Answers
Answer:
Under the fixed Installment method, the depreciation expense should be charged over the useful life plus the depreciation expense is same for all remaining useful life
And, in the diminishing balance method, the depreciation expense should be reduced every year and in this method, the residual value or salvage value should be ignored. It is not considered in the computation part so only original cost is taken.
Explanation:
ANSWER :
The difference between Fixed Instalments Method and Reducing Balance Method of depreciation are as follows :-
[1] Fixed Instalment Method is a method of providing depreciation under which depreciation is charged at a fixed percentage on the original cost of the asset.
Whereas, Reducing Balance Method is a method of charging depreciation under which a fixed rate or percentage of depreciatuin is charged each year on the diminishing value of the asset till the amount is reduced to its scrap value.
[2] Under Fixed Instalment Method, the amount of depreciation for a particular asset remains same from year to year.
Whereas, under Reducing Balance Method, as the value if asset goes on diminishing year after year, the amount of depreciation charged every year also goes on diminishing; although the rate of the depreciation remains fixed.
[3] The amount of depreciation is calculated by deducting the scrap vaiue from the original cost of the asset and then dividing the remaining balance by the number of years of estimated life under Fixed Instalment Method.
Whereas, depreciation is calculated on the balance of asset as appearing at the beginning of each year, i.e., on the diminishing value of the asset each year under Reducing Balance Method.
[4] Under Fixed Instalment Method of charging depreciation, there is unequal charge against income. The total burden charged to Profit and Loss Account in respect of depreciation and repairs put together is not be equal each year.
Whereas, under Reducing Balance Method, there is equal charge against income. The total burden charged to Profit and Loss Account in respect of depreciation and repairs put together remains almost equal each year.
[5] Sometimes under Fixed Instalment Method, even after the value of an asset is reduced to zero in the books, it continues to be used in the business in actual practice. Hence, it is unrealistic to write off the value of asset to zero under this method.
Whereas, Reducing Balance Method ensures that the asset is never reduced to zero so that some depreciation, however it is small, is debited to the Profit and Loss Account as long as the asset remains in use in the business.
MORE TO KNOW :
In accounting, depreciation is the process of allocating the net cost of fixed assets over ots estimated useful life.
The word "Depreciation" has been derived from the Latin word "Depretum". 'De' means 'decline' and 'pretum' means 'price'. Hence, "Depreciation" mean "decline in price".
There are various methods of providing depreciation on assets. These are :
- [i] Straight Line Method or Original Cost Method or Fixed Instalment Method.
- [ii] Diminishing Balance Method or Written Down Method or Reducing Balance Method.
- [iii] Annuity Method
- [iv] Depreciation Fund Method
- [v] Insurance Policy Method
- [vi] Revaluation Method
- [vii] Depletion Method
- [viii] Machine Hour Rate Method