Question

(a) Explain the term ‘depreciation’.

(b) Explain the three methods of depreciation.

20 mark

Answer 1

Ans (a) Depreciation Depreciation is a measure of the wearing out, consumption or Other loss of value of depreciation asset arising from use effluxion of time or obsolescence through technology and market changes. Depreciation is allocated a fair propo amount in each accounting period during the expected useful life of the asset. Depreciation includes amortizat- of assets whose useful life is predetermined. so as to charge stion of the depreciable în Ans (6) The three methods of depreciation : (1) Straight line method of fixed installment - Under this method, the same amount of depreciation is charged every year throughout the life of the asset. Cost of an Asset - Residual value Straight line depreciation method Useful life of an Asset (2) Double Declining Balance Method (ODB mothed) - In this method, depreciation is charged on the reduced value of the fixed asset in the beginning of the year. This method is a mix of straight line and diminishing balance method. This rate of

depreciation is twice the date charged under straight line method. Thus, this method leads to an over depre- ciated end of its useful life as compared to the anticipated Salvage value. asset at the DDB Depreciation 2x ( cost of an asset - salvage value) useful life of an asset (3) Diminishing Balance Method :- This method is also known as red reducing balance method declining balance methol. A fixed percentage of depreciation is charged in each accounting period to the net balance of the fixed asset under this method. This net balance is nothing but the value of asset that remains after deducting accumulated depreciation. Thus, #it means that depreciation rate charged on the reducing balance of the asset. Depreciation value of asset at beginning of the Expense year X Rate of depreciation) 100