Fixed assets are those which last for more than one year, however they cannot last forever that is why it is important to allocate the cost of theses fixed assets over a period of time, and for serving that purpose depreciation is used. It refers to decline in the value of fixed assets over a period of time. Given below are the various methods of calculating depreciation –
1. Straight Line Method – Under this method fixed amount is charged as depreciation for an accounting year during the lifetime of an asset. Under this method value of asset becomes zero at the end of its useful life. Under this method amount of depreciation remains constant in this method. For example if an asset worth $5000 is purchased and depreciation is 10 percent than value of asset will become zero at the end of 10th year.
2. Written down value Method – Under this method deprecation is charged at a fixed rate on the reducing value of asset every year. Under this method deprecation rate is fixed in advance and the value of asset will never be zero under this method. However under this method amount of deprecation keep reducing from year after year that is, highest during initial years and keeps declining in subsequent years.
3. Per unit method – In this depreciation method, depreciation is calculated by dividing the total cost of the asset by the total number of units which it is expected to produce during its useful life.
Among above methods, straight line and written down value method are more commonly used than other methods of depreciation like Sum of the Years’ Depreciation, declining method of depreciation etc….