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Question
State the advantages of straight-line method of depreciation.
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Solution
Following are the advantages of straight-line method of depreciation:
- Simple and easy to understand:
Computation of depreciation under this method is very simple and is easy to understand. - Equality of depreciation burden:
Under this method, equal amount of depreciation is debited to the profit and loss account each year. Hence, the burden of depreciation on the profit of each year is equal. - Assets can be completely written off:
Under this method, the book value of an asset can be reduced to zero if there is no scrap value or to the scrap value at the end of its useful life. Thus the asset account can be completely written off. - Suitable for the assets having fixed working life:
This method is appropriate for the fixed assets having a certain fixed period of working life. In such cases, the estimation of useful life is easy and in turn it helps in easy determination of rate of depreciation.
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Raj & Co purchased a machine on 1st January 2014 for ₹ 90,000. On 1st July 2014, they purchased another machine for ₹ 60,000. On 1st January 2015, they sold the machine purchased on 1st January 2014 for ₹ 40,000. It was decided that the machine be depreciated at 10% per annum on the diminishing balance method. Accounts are closed on 31st December every year. Show the machinery account for the years 2014 and 2015.
On 1st April 2015, Farid of Nasik purchased a Motor Car for ₹ 55,000. The scrap value of the Motor Car was estimated at ₹ 10,000 and its estimated life is 10 years. The Registration charge for the Motor Car was ₹ 5,000.
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On 1st April 2015, Farid of Nasik purchased a Motor Car for ₹ 55,000. The scrap value of the Motor Car was estimated at ₹ 10,000 and its estimated life is 10 years. The Registration charges of the Motor Car was ₹ 5,000.
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A firm buys a machine that wears out faster in early years but provides greater efficiency initially. Which depreciation method would most accurately reflect this pattern?
