METHODS OF DEPRECIATION CALCULATION AND THEIR IMPLICATIONS

Methods of Depreciation Calculation and Their Implications

Depreciation is a crucial aspect of accounting, especially for businesses with tangible assets. In India, there are several methods of calculating depreciation, each with its own implications. Let’s explore some key methods and their implications:

1. Straight Line Method (SLM):

Key Points:

• Under SLM, depreciation is calculated by spreading the cost of the asset evenly over its useful life.
• Formula: Depreciation = (Cost of Asset – Salvage Value) / Useful Life.
• Implications: Simple to calculate and understand. Suitable for assets with a consistent rate of wear and tear.

2. Written Down Value Method (WDV):

Key Points:

• WDV method considers depreciation as a fixed percentage of the remaining book value of the asset.
• Formula: Depreciation = WDV at the beginning of the year * Depreciation Rate.
• Implications: Reflects higher depreciation in the initial years, making it advantageous for tax purposes. However, it may not accurately represent the asset’s true economic value.

3. Unit of Production Method:

Key Points:

• This method calculates depreciation based on the actual usage or production of the asset.
• Formula: Depreciation = (Cost of Asset – Salvage Value) / Total Units of Production.
• Implications: Ideal for assets where wear and tear directly correlate with usage. Provides a more accurate reflection of an asset’s depreciation.

4. Sum of the Years’ Digits Method (SYD):

Key Points:

• SYD method accelerates depreciation, allocating higher depreciation expenses in the earlier years.
• Formula: Depreciation = (Remaining Useful Life / Sum of the Years’ Digits) * (Cost of Asset – Salvage Value).
• Implications: Suitable for assets that experience higher wear and tear in the initial years. Results in higher depreciation expenses early on, impacting profitability.

5. Double Declining Balance Method (DDB):

Key Points:

• DDB method accelerates depreciation, depreciating assets at a rate double that of the straight-line method.
• Formula: Depreciation = 2 * (Cost of Asset – Accumulated Depreciation) / Useful Life.
• Implications: Front-loads depreciation expenses, reflecting higher expenses initially. May not comply with accounting standards in some cases.

6. Group Depreciation Method:

Key Points:

• This method groups similar assets together and calculates depreciation for the group as a whole.
• Formula: Depreciation = (Cost of Group – Salvage Value of Group) / Total Useful Life of Group.
• Implications: Simplifies the calculation process for businesses with multiple assets of the same type. However, may not provide accurate depreciation figures for individual assets.

 Choosing the right depreciation method is crucial as it impacts financial statements, tax liabilities, and profitability. Each method has its own implications, and businesses must carefully evaluate their assets and financial goals to select the most suitable method. Additionally, adherence to accounting standards and regulations is paramount to ensure accuracy and compliance.