charge As the cost of repair goes on increasing with the passage of time, the total charge, i.e., the total of depreciation amount and repair amount keeps on increasing from year to year. As the cost of repair increases and depreciation decreases with the passage of time, total of depreciation amount and repair amount charged to profit and loss account remains almost the same from year to year. . Suitability It is suitable for assets for which the repair charges are less and the possibility of obsolescence is less and expiration of cost of asset depends upon time period involved.
It is suitable for assets which are affected by technological changes and assets which require more repairs with the passage of time. Straight line method Total cost Written down value method Repairs Total cost Depreciation Repairs Depreciation Amount ` Amount ` Year Year . . Sum of years of digits method This method is similar to the diminishing balance method.
The amount of depreciation goes on decreasing year after year in proportion to the unexpired life of the asset. This method is suitable for those assets having more probability of obsolescence and increased repair charges as the assets grow older. Under this method, amount of depreciation per year is calculated by multiplying the cost of the asset and the number of remaining years of life and dividing it by the sum of the digits of all years of life of the asset. The following formula is used to compute the amount of depreciation under this method: Amount of depreciation = Original cost - Scrap value Sum of all the digits of all years from to the life of the asset in years Total number of years of remaining life of the asset (including the current year) Student activity Think: Why does a business use different rates of depreciation for different types of assets?
Accountancy . . Machine hour rate method Under this method, depreciation per machine hour is calculated. The cost of the machinery after deducting the residual value, if any, is divided by the