Understanding Bookkeeping

STRAIGHT LINE METHOD OF FIXED INSTALLMENT METHOD OR STRAIGHT LINE BASIS

Example:

A machine has an estimated life of 10 years costing $40,000 and has a residual/salvage value of $10,000

Depreciation per year is :

(Cost less Estimated residual value)/Estimated life

=$40,000-10,000=$30,000/10 years

=$3,000 per year

REDUCING BALANCE METHOD:

Example:

A machine was bought for $10,000 and a depreciation rate of 10% per annum is allowed, the depreciation is:

Year 1: Cost of machine $10,000

Less: Depreciation 10% $1,000

Reduced Balance $9,000

Year 2: Less Depreciation 10% $900

Reduced Balance $8,100

Year 3: Less Depreciation 10% $810

Reduced Balance $7,290

SUM OF THE YEARS DIGITS METHOD

This method assumes that the depreciation charge should be the heaviest in the early years of the life of the fixed asset.

It allocates annual depreciation in proportion to the number of years of an asset’s useful life which remains at the commencement of an accounting year.

Example:

A machine cost $30,000 which has an estimated life of 5 years.

Life-expectancy

1 st year 5

2 ^nd year 4

3 rd year 3

4 th year 2

5 th year 1

Sum of digit 15

Hence, the formula for annual depreciation is:

(Number of years of life remaining/Total of digits of years of life) x Cost less residual value which is :

Year 1: Depreciation is 5/15 x $30,000 =$10,000

Year 2: Depreciation is 4/15 x $30,000 =$ 8,000

Year 3: Depreciation is 3/15 x $30,000 =$ 6,000

Year 4: Depreciation is 2/15 x $30,000 =$ 4,000

Year 5: Depreciation is 1/15 x $30,000= $ 2,000