What Is Depreciation And What Are The Benefits Of Taken Out It
Depreciation is the term that uses in accounting field. Depreciation is the main part of the account. To make it understand easily for everyone let’s take an example to understand the term depreciation. When you purchase a machine let suppose a washing machine and take it to the home. The seller gives the warranty of washing machine for a certain period but after completing that period. If your washing machine gets out of order then the seller won’t be responsible then you will need to purchase another washing machine. Sometime it happens that we didn’t keep enough money to purchase a new machine at that time we feel sorry for ourself that we can’t afford even a washing machine. To escape from this condition some here is a one solution.
When you purchase a machine with the price of Rs 10000. Then divide 10000 with the given warranty of the machine. For example the warranty on the machine is for 5 years. They simply 10000/5 the result will 2000 per year. Now the conclusion is that if you save 2000 per month they you will be able to save 10000 in 5 years. If at that time your washing machine gets out of order and you are not in condition to purchase they you can use your saved 2000 per month for washing machine. That is called the depreciate valued that you save for worse conditions. The same thing happened in the industries. They take out the depreciation of all the machine every month. So that if they found any machine out of order at that time they just replace the machine by using the monthly save depreciating money.
Accounting has given us rules and regulation to take out the depreciation. Having followed those rules we have to take out the depreciation. There are 5 methods to take out the depreciation of any machine. Different companies take out the depreciation with different methods. Straight line method, Declining method, the sum of the year digits method, unit production method, hourly production method. These are the method that is used by the companies according to the requirement. Let discuss all the methods in details therefore It can be understood easily.
Straight line method
The simplest method is used on fixed asset depreciation. We use the method to take out the depreciation on any fixed asset. It contains the simple formula. The cost of machine – salvage value and divided by the life of the machine. Most of the people will become confused with salvage value what is it. The salvage value is that value when you machine become out of order and your sale it at that price that is called salvage value of the machine. The salvage value of machine become less of the cost of the machine and we divide it with life of machine than we find deprecation of machine yearly. This method is only used for yearly depreciation. Some of the companies use this method to take out the depreciation
Declining method / diminishing balance method
This method is used by some of the companies. We use this method for yearly depreciation but also it has some variations. As we don’t use accumulated depreciation in straight line method and also we don’t used month but in Declining method we calculated the accumulated depreciation and make it less of the original cost of the machine. If you have purchased a machine in November, if the company closes its accounting year in June then you will take out first year depreciation from the month of November to May. The first year depreciation will be calculated on the purchase date to the accounts year end of the company and for the next year the same method will be followed but every year the accumulated depreciation will be less of the cost of the machine.
Sum of the year digit method.
We use the formula to use it. The sum of the year digits= n (n+1) /2. This formula will be used to take out the total number of years. First we will calculate total number of years. Let suppose if we have to take out the depreciation of 4 years. Then first step will be 1+2+3+4=4 (4+1) /2= 10 the total number of years is 10. The sum of the year digit method is used to take out the monthly depreciation. In this method first we will take out the depreciation for the last year then will go to first year.
Unit production method
In unit production method we calculated the depreciation according to the production unit. If any machine becomes depreciate in 5 years having made the 1 core product. Then we take out the depreciation of machine on the basis of produce product. Some of the companies use this method for depreciation.
Hourly production method
Some of the companies take out the depreciation on the basis of hourly. They calculated the hourly of machine that how many hour this machine has given the product. The depreciation method is used according to the hour in which machine has produced the product and calculated the depression by hours. These are the methods of depreciation that are created according to the rules of accounts to facilitate the accounts. These are the basic rule of accounts so their people can follow it to make their work easy and faster. Depreciation it most useful feature of accounting because it make the company able to meet their requirement of the machine and the member of the company know about that how much more time this machine will produce a product. The depreciation can be taken out on any fixed asset. If we don’t take out he depreciation then we won’t be able justify the life of the machine. If we got big project and we are not in condition to purchase new machine then this will be the biggest shock to the company. Depreciation is a spine of the company. Use your source to calculate the depreciation of the machine therefore you won’t get any setback at the end.