Where µn¶ = Number of years of asset lifeAs the amount of depreciation is based on written down value of the asset, it is also referred to as
ritten down Value Method
Another term used for this method is µReducing BalancingMethod¶.
use of this method results in following advantages:1.
It makes proper allocation of cost because more depreciation is charged in the earlier yearswhen its utility is more as compared to later years when it becomes less useful2.
Equal amount is charged to profit and loss account. This is so because amount of repair andmaintenance increases and amount of depreciation decreases with the passage of time.3.
As major portion of depreciable cost is recovered in earlier years, technological changeswhich make existing assets obsolete and require replacement will not pose much problem.
it suffers from the following drawbacks1.
As depreciation is calculated at fixed percentage of written down value, depreciable cost of asset cannot be fully written off.2.
It does not take into consideration the interest on the capital invested in the asset.3.
It does not ensure liquid funds at the time of replacement of an asset.4.
It is very difficult to calculate the rate of depreciation.
This method is suitable for those assets in relation to which:a)
The amount of repairs and renewals goes on increasing as the asset grows older b)
The possibilities of obsolescence are more.c)
This method is suitable for plant and machinery, building and furniture etc.3.
Under this method the annual depreciation charges would beascertained with the help of Annuity Table. This method gives importance to interest factor.Other methods do not take into account the interest factor while calculating depreciation.Fixed interest rate is charged on the opening balance of each year and then the cost of assettogether with interest thereon is written off equally over the life of the asset.
enerally, manual calculation of rate is not very easy and logarithm tablesare used for this purpose. Moreover, if residual value is zero, rate of depreciation cannot be calculated.