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1.Straight Line Depreciation Method
Straight line method depreciates cost evenly through out the useful life of the fixed asset. Straight line depreciation is calculated as follows:
Depreciation per annum = (Cost - Residual Value) / Useful Life
Where:Cost includes the initial and any subsequent capital expenditure.
Residual Value is the estimated scrap value at the end of the useful life of the asset. As the residual value is expected to be recovered at the end of an asset's useful life, there is no need to charge the portion of cost equaling the residual value.
Useful Life is the estimated time period an asset is expected to be used from the time it is available for use to the time of its disposal or termination of use. Useful life is normally calculated in units of years but it may be calculated based on an alternative basis. Useful life of an oil extraction company may for example be the estimated oil reserves.
2.Reducing Balance Depreciation Method
Reducing Balance Method charges depreciation at a higher rate in the earlier years of an asset. The amount of depreciation reduces as the life of the asset progresses. Depreciation under reducing balance method may be calculated as follows:
Depreciation per annum = (Net Book Value - Residual Value) x Rate%
Where:Net Book Value is the asset's net value at the start of an accounting period. It is calculated by deducting the accumulated (total) depreciation from the cost of the fixed asset.
Residual Value is the estimated scrap value at the end of the useful life of the asset. As the residual value is expected to be recovered at the end of an asset's useful life, there is no need to charge the portion of cost equaling the residual value.
Rate of depreciation is defined according to the estimated pattern of an asset's use over its life term.
3.Units of Production Depreciation Method
Units of Production Depreciation Method, also known as Units of Activity and Units of Usage Method of Depreciation, calculates depreciation on the basis of expected output or usage.
For example, a machine may be depreciated on the basis of output produced during a period in proportion to its total expected production capacity. Therefore, useful life of an asset under Units of Production Method is stated in terms of production output or usage rather than years of service.
Depreciation per annum = (Cost - Residual Value) / Useful Life
The Formula for calculation of depreciation under Units of Production Method is as follows:
Stage of Completion %=Value of Work Certified as complete/Total Expected Production or Usage x100
4.Sum of Year's digits method of depreciation.
Sum of the years' digits depreciation method, like reducing balance method, is a type of accelerated depreciation technique that allocates higher depreciation expense in the earlier years of an asset's useful life.
Calculation of depreciation under this method can be summarized in the following4 steps:
Step1: Calculate the sum of the years' digits in an asset's useful life
For an asset having a useful life of4 years, the sum of the years' digits will be calculated as follows:
Sum of years' digits =4 +3 +2 +1 =10
Step2: Calculate the depreciable amount
Depreciable amount, as with all depreciation methods, is equal to:
Asset's cost of acquisition or construction including any subsequent capital expenditure
Less: Estimated residual value or scrap value at the end of the asset's useful life
Step3: Calculate the un-depreciated useful life
Un-depreciated useful life is equal to the number of years in the asset's useful life that have not yet been subjected to depreciation.
Hence, for an asset that has a useful life of4 years, the un-depreciated useful life to be used in calculating depreciation shall be4 years in the first year of depreciation,3 years in the second year and so on.
Step4: Calculate depreciation using the sum of years' digits & un-depreciated useful life
Depreciation using the sum of the years' digits method can be calculated using the following formula:
Depreciation Expense=Un-depreciated useful life (Step3)xDepreciable Amount (Step2) / Sum of the years' digits (Step1)
AGREE WITH MR VENKITARAMAN
Thank you Mr. Venkterma KRISHNA MOORTHY For this wonderful answer I wish you success
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