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Question

Describe in detail two methods of recording depreciation. Also give the necessary journal entries.

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Solution

Here are the two methods of depreciation as follows

(i) Straight Line Method In straight-line method of depreciation, a fixed and an equal amount is charged as depreciation in every accounting period during the lifetime of an asset. The amount annually charged as depreciation is such that it reduces the original cost of the asset to its scrap value, at the end of its useful life.

In this case, the depreciation amount is also calculated by dividing the depreciable cost by the estimated life of the assets. It is also called Fixed instalment method because the amount of depreciation remains constant from year to year over the useful life of the asset.

(ii)Written Down Value Method In written down value method, the depreciation is calculated at a fixed percentage of written down value of the asset. The method assumes that benefit accruing to business by utilisation of asset keeps on decreasing as the assets get old. As the value of the asset goes on decreasing from year to year, the amount of depreciation charged to different accounting years decreases with the passage of time.

Journal Entries

DateParticularsL.FAmt.(Dr)Amt.(Cr)Depreciation A/c Dr....... To Sundry Assets A/c.......(Depreciation charged on sundry assets)––––––––––––––––––––––––––––––––––––––––––Profit and Loss A/c Dr....... To Depreciation A/c.......(Depreciation transferred to P&L Account)


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