iv) Machine hour rate method v) Depletion method vi) Annuity method vii) Revaluation method viii) Sinking fund method ix) Insurance policy method . . Straight line method/ Fixed instalment method / Original cost method Under this method, a fixed percentage on the original cost of the asset is charged every year by way of depreciation. Hence it is called original cost method.
As the amount of depreciation remains equal in all years over the useful life of an asset it is also called as fixed instalment method. When the amount of depreciation charged over its life is plotted on a graph and the points are joined together, the graph will show a horizontal straight line. Hence, it is called straight line method. This method is suitable for those assets the useful life of which can be estimated accurately and which do not require much expense on repairs and renewals.
Under this method, the following formulae are used for calculating the amount of depreciation and the rate of depreciation respectively: Original cost of the asset − Estimated scrap value Amount of depreciation per year = Estimated useful life of the asset in years Amount of depreciation per year Rate of depreciation = x Original cost Tutorial note a) In the year of purchase, if the period of use is less than a year, the amount of depreciation will be charged proportionately for the period for which the asset has been used in the business. b) If depreciation is deducted from the cost of the asset at the end of useful life of the asset the amount left in the asset account will be equal to the scrap value if there is any scrap value or it will be zero if there is no scrap value. Accountancy Example On . .
, a firm purchased a machine at a cost of ` , , . Its life was estimated to be years with a scrap value of ` , . The amount of depreciation to be charged at the end of each year is: Original cost of the asset −