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Depreciation Methods

(Methods of Cost Allocation)

There are a number of methods of allocating cost of fixed depreciable assets. Such allocation has a direct effect on the determination of net income because depreciation expense is a necessary charge and as such a deduction from the revenues of a given period. The basic objective of different depreciation methods should be therefore to provide a systematic and rational basis for allocating cost of an asset over its useful life for proper reporting and periodic matching of costs and revenues. Various methods of depreciation in use are generally classified as:

(A)    Based On Time:

(i) Straight-line depreciation (ii) Decreasing charge depreciation: (a) Diminishing balance or written down value method. (b) Sum-of-the-years-digits method. (c) Double-decline-balancing method.

(B)    Based On Investment And Interest Concepts OR Increasing Charges Depreciation:

(a) Annuity method (b) Sinking fund method

(C)    Based On Output:

(i) Service hours methods (ii) Units of output method.

(D)    Group-Rate And Composite Rate-Methods:

(i) Group Depreciation (ii) Composite depreciation.

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