Let’s go to next module, methods for calculation of depreciation. So, methods for calculation of depreciation means to determine the amount of depreciation, there are different methods.
So let’s proceed further, before that we have to understand one more important term, that is Written Down Value abbreviated as WDV, very commonly abbreviated as WDV. So, what is that WDV? It is the value of assets in the books after deducting depreciation from the original cost of the asset. After deducting depreciation, we have seen depreciation is reduction, so when we deducted this depreciation, whatever is left that is called as WDV. See, further every year depreciation is charged with which reduces the book value of the asset. Because of charging depreciation its value goes on decreasing and that value we call as book value. So, book value goes on decreasing because of charging depreciation. Written Down Value goes on decreasing every year as depreciation is continuous reduction in the value of fixed assets. Depreciation is the continuous reduction every year, depreciation will be taking place and that will keep on decreasing the value of fixed assets. So that value after charging depreciation is Written Down Value.
Let’s see here one illustration, original cost of the asset Rs. 1 lakh less depreciation, we are charging depreciation on this particular asset, just one hypothetical figure we have taken here depreciation is Rs. 20,000. That we are going to see how to calculate that, but at present to understand this WDV we have taken depreciation Rs. 20,000, that means the value of fixed asset decreased by 20,000 at the end of first year. Now, tell me, friends, what is the value of asset in our books, our books value is Rs. 80,000, and the original cost one lakh, depreciation charged, so now it is 80,000 at the end of first year or beginning of second year. Now, this 80,000, what do you call this, just now we saw that value after deducting depreciation from original cost is called as Written Down Value. So this is WDV. After that second year we use it, again we charge same amount of depreciation, I told you this is just hypothetical figure just to understand this particular WDV. So, again same depreciation charged 20,000 and now at the beginning of the third year the value of the asset is 60,000. So this is book value at the beginning of the third year because of depreciation it has decreased, again this is called as WDV. So, after charging depreciation whatever is left that is known as WDV. So third year again we charge depreciation of 20,000 and now the value is 40,000, this is called also WDV. So, from this as it will go on and so on every year we will charge depreciation, every year the value goes down and that value after charging depreciation is known as WDV. And so first year 80,000, second year 60,000 and third year 40,000, value of asset after deducting depreciation is Written Down Value, whereas, the original cost never changes. So, here the WDV goes on decreasing every year but the original cost will never change. The original cost remains constant.
Then after that, let’s see further method for calculation of depreciation. Now, method, different methods are there for calculation of depreciation, number of methods are applied to calculate depreciation to be charged for the accounting period. Out of the various methods mentioned below, a suitable method is based on the nature, scope of business and concerned fixed assets as well as provision of the concerned act are adopted. So, now which method is to be followed that depends on nature of business, scope of business, after that nature of concerned fixed assets and obviously unavoidable that is the provision of laws applicable to that particular business. Now, the syllabus for FYJC prescribed first two methods only. So, out of the list of methods, two methods only are there in FYJC syllabus, remaining methods you will study in further standards. So, check first method Original Cost Method, second method Written Down Value Method, third is Annuity Method, fourth is Depreciation Method, after that Machine Hour Rate Method, after that Insurance Policy Method, Sum of years digit method, etc. Out of this only first two are applicable for the syllabus of FYJC, that is Original Cost Method and Written Down Value Method.
So, let’s move to first method which is there as per our syllabus, Original Cost Method. Understand what is that, under this method, depreciation is calculated on the original cost of asset every year at a fixed rate of depreciation or by a fixed amount of depreciation. So, every year we will calculate depreciation on the original cost, of course when you have to calculate depreciation, if the rate of depreciation is given. So, that rate of depreciation remains constant and every year it will be applied to original cost or directly will be given the amount of depreciation. So, the same depreciation will be charged every year.
Since, original cost is fixed, rate of depreciation is fixed, amount of depreciation every year is also fixed. Original cost is fixed, we have seen never changes, rate of depreciation is fixed and so, because of that amount of depreciation is also fixed. The amount of depreciation remains constant every year on a particular asset. So, it will remain constant, it will not change year by year. It is also called as Straight Line Method or Fixed Instalment Method, due to this reason as the amount of depreciation is fixed, that means the instalment of depreciation is fixed, it is also called as Fixed Instalment Method or Straight Line Method..
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