Depreciation, Provisions and Reserves

The useful life of the asset is years and net residual value is estimated to be Rs. , . Now, the amount of depreciation to be charged every year will be computed as given below: Annual Depreciation Amount asset of life Estimated value l residentia net Estimated asset of cost Acqusition − , , , i.e. − The rate of depreciation will be calculated as : (i) cost n Acquisitio amount on depreciati Annual on Depreciati of Rate × From point (i), the annual depreciation amounts to Rs. , . Thus, the rate of depreciation will be = % , , × . . . Advantages of Straight Line Method Straight Line method has certain advantages which are stated below: It is very simple, easy to understand and apply. Simplicity makes it a popular method in practice; Asset can be depreciated upto the net scrap value or zero value. Therefore, this method makes it possible to distribute full depreciable cost over useful life of the asset; Every year, same amount is charged as depreciation in profit and loss account. This makes comparison of profits for different years easy; This method is suitable for those assets whose useful life can be estimated accurately and where the use of the asset is consistent from year to year such as leasehold buildings. , , , Year Fig. . : Depreciation amount under straight line method