Depreciation of Various Assets:
Learning Objectives:
-
How should the depreciation on
various assets be calculated?.
We discuss below the problem
of depreciating some given assets.
Freehold Land and Building:
It means that land and
building which has been purchased out right and not on lease. In the case of
building it will be seen that in its early life, few repairs will be needed.
These repairs will keep the building in proper order. But after sometime the
building will begin to decay and even the repairs will not succeed in
keeping it in proper working order. Efficient repairs, no doubt, add to the
life of the building, but they cannot make it everlasting. After some
considerable time the building will practically fall in spite of all the
repairs. Hence it is absolutely necessary to charge depreciation on such
building, so that by the time it falls down, its book value also disappears
from the books of accounts. As this asset possesses a long life, the method
of depreciation employed should be such as it provides a fund for its
reconstruction on its dilapidation. Thus either of the
straight line method or
reducing installment method
may be adopted to depreciate this asset.
One of the peculiarly of the
land is that it does not generally depreciate. Its value may and does
fluctuate from time to time, but such fluctuations do not influence
depreciation in any way. Consequently older accountants were of the opinion
that land should be left at the cost price in the books. According to modern
opinion the idea of the depreciation with regard to land cannot be ruled out
entirely. Agricultural land may loss its fertility. Brick land may
depreciate. as such, in some cases at least land must be depreciated.
Leasehold Land and Building:
By leasehold is meant the land
that is taken on lease for a certain number of years. The most general
duration is 99 years, but may of course be less or much more. If the lease
under which the property is acquired is short, the
fixed installment method or straight line method
of depreciation can be applied conveniently. If on the other hand, it be a
long lease, the
annuity method of depreciation
would be more suitable. The value of the leasehold property should be
written off during the term of the lease and the rate of depreciation should
be fixed accordingly.
Plant and Machinery:
This term includes machinery
of different kinds e.g., engines, boilers, fixed plant, running machinery,
etc. As the working life of each one of them is different, the rate of
depreciation should also be different. Though
fixed installment method or straight line method
can be suitably applied to depreciating plant and machinery but owing to the
difficulty of calculating depreciation on additions made during the year,
the
diminishing balance method is
generally employed to depreciate this asset.
Loose Tools:
As this asset is liable to
breakage and pilferage, it should be annually valued. The difference between
the present value and the value as per last balance sheet should be treated
as depreciation.
Furniture and Fixture:
The
diminishing balance method is
usually employed to depreciate this asset. The rate of depreciation should
be high enough to reduce it to its residual value at the end of its working
life.
Patents and Copyrights:
There is a maximum legal life
of such assets but the commercial life (during which such assets can be
effectively exploited) may even be shorter. The assets should be depreciated
by the straight line method so that it is written off within the legal or
commercial life whichever is shorter.
Mines, Oil Well, Quarries, Etc:
The depreciation should be
estimated by the
depletion method.
Goodwill:
Goodwill has been defined as
the benefit or advantage arising from regular public patronage on account of
facilities offered. The name under which the business is carried on acquires
a reputation and consequently a saleable value. It can be sold only when
entire business is sold off. It is an intangible asset. Though goodwill is a
fixed asset it does not depreciate on account of wear and tear like plant
and machinery etc. As goodwill is not consumed in the process of earning
income, it is not necessary to depreciate it. But as no business, howsoever
well established, can have perpetual life, it is advisable to create a
reserve from the profit and loss account in prosperous years because when
profits fall and goodwill depreciates it may be difficult to write it off.
|
