Q 9.47: A larger amount of depreciation is allocated to the earlier years of the asset's useful life than to the later years of the asset's life is a distinguishing feature of which method of depreciation?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
1. Straight-line:
Under this method, the value of the asset is depreciated equally over the useful life of the asset. Hence under this method, depreciation is charged equally over the useful life.
2. Units of activity:
The units of activity method of depreciation are unique in that a plant asset's useful life is expressed in the total unit that is expected to be produced or the asset's total activity during its life.
3. Declining balance:
This method is the opposite of the straight-line depreciation method. Under this method, a larger amount of depreciation is allocated to the earlier years of the asset's useful life than to the later years of the asset's life is a distinguishing feature of this method.
Formula: Declining Balance Depreciation = Current Book Value x Depreciation Rate (%)
[Explanation: As year by the year Book value of the asset reduces its depreciation also reduces.]
4. Amortization:
Amortization is a method of spreading the cost of an intangible asset over a specific period of time.
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