Discuss the advantage and disadvantage of fixed installment method and diminishing balance method in accounting and financial analysis
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Fixed installment:
Merits
It is simple and easy method the value of Assets I can becompletely return off. The value of the asset each year in the balance sheet is reasonably fair there is no change either in rate or amount of depriciationover the useful life of the asset
Demerits:
The assumption that the assets shall be equally useful throughout its life seems to be illogical it does not take into account the effective utilisation of the Asset it even though the Asset it is used to uniformly from period to period the total charge for the use of the Asset it keeps on increasing every year this is because cost of repairs in each subsequent year rises though equal amount of the precision is return
Diminishing balance method
Merit
It is simple and easy method every year there is an equal burden for using the asset it this is because the depriciation goes on decreasing every year where is cost of repair increases the the obsolencence problem is given due care since major part of depriciation is charged in earlier years and the management may find it easy to replace the asset. income tax authorities recognise this method. all items including additions are added together and appreciated at the same rate.
Demerits:
It is difficult to deter mine and appropriate rate of appreciation
The value of Asset cannot be brought down to 0
Debris see Asian is neither based on use of the asset nor distributed evenly throughout the useful life of their is it
Merits
It is simple and easy method the value of Assets I can becompletely return off. The value of the asset each year in the balance sheet is reasonably fair there is no change either in rate or amount of depriciationover the useful life of the asset
Demerits:
The assumption that the assets shall be equally useful throughout its life seems to be illogical it does not take into account the effective utilisation of the Asset it even though the Asset it is used to uniformly from period to period the total charge for the use of the Asset it keeps on increasing every year this is because cost of repairs in each subsequent year rises though equal amount of the precision is return
Diminishing balance method
Merit
It is simple and easy method every year there is an equal burden for using the asset it this is because the depriciation goes on decreasing every year where is cost of repair increases the the obsolencence problem is given due care since major part of depriciation is charged in earlier years and the management may find it easy to replace the asset. income tax authorities recognise this method. all items including additions are added together and appreciated at the same rate.
Demerits:
It is difficult to deter mine and appropriate rate of appreciation
The value of Asset cannot be brought down to 0
Debris see Asian is neither based on use of the asset nor distributed evenly throughout the useful life of their is it
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