What are the two methods of providing depreciation? Explain their merits and demerits
Answers
Answer:
straight line method
diminished balance method
diminished is most popular
straight line we take original cost
Two methods of providing depreciation are the straight-line method and the written down value method.
1) Straight-line method: Under this method of charging depreciation, a fixed amount is deducted from the value of the asset. We minus the scrap value of the asset from its cost and then divide it by the number of useful years to get the depreciation amount.
Merits:
a) The amount of depreciation is easy to calculate.
b) This method helps to completely write off the book value of the asset.
Demerits:
a) In this method, the business keeps the depreciation charge so there is no provision for replacement of the asset.
b) Since the depreciation charge is equal in all years, it puts pressure on the asset in its final years.
2) Written down value method: Under this method of charging deprecation, the depreciation amount is calculated by charging a fixed percentage on the reducing value of the asset.
Merits:
a) The burden on the asset in its final years is low because the depreciation charged in the final years is low.
b) It is simple to understand as depreciation reduces with reducing asset value.
Demerits:
a) In this method, we cannot completely write off the value of the asset.
b) This method is not very useful for assets that have a short life span.