, Solution Original cost of the asset − Estimated scrap value Amount of depreciation per year = Estimated useful life of the asset in years , – , , = = ` per year = Amount of depreciation per year Rate of depreciation = x Original cost = x = % , . . Written down value / Diminishing balance method Under this method, depreciation is charged at a fixed percentage on the written down value of the asset every year. Hence, it is called written down value method.
Written down value is the book value of the asset, i.e., original cost of the asset minus depreciation upto the previous accounting period. As the amount of depreciation goes on decreasing year after year, it is called diminishing balance method or reducing installment method. The following formula is used to compute the rate of depreciation under written down value method: Scrap value x Original cost − n Example : Original cost ` , , ; Scrap value ` , ; Useful life years , x , , = [ −( . ) / ]x − =( − .
) x = . x = . % Rate of depreciation = . % If the scrap value is , ; rate of depreciation is .
% If there is no scrap value, rate of depreciation will be %. Hence, to calculate depreciation the scrap value is taken as . If the scrap value is less, rate of depreciation will be high. Accountancy Example On .
. , a firm purchased a machine at a cost of ` , , . Depreciation charged at % p.a. on written down value method for the five years is as follows: Cost of the asset on .
. Less: Depreciation for at % on , , ` , , ` , Written down value on . . Less: Depreciation for at % on , ` , ` , Written down value on .
. Less: Depreciation for at % on , ` , ` , Written down value on . . Less: Depreciation for at % on