Learn Important Facts on Diminishing Balance Method from 24x7assignmenthelp.com
In an organization, calculating right value is very important. Depreciation doesn’t involve direct cash flow but it affects profit and loss account. This depreciation is calculated by following various types of method. There is straight line method with simplest calculating process and there is diminishing balance method. You can find about this method from Diminishing or Reducing or Written down Value Method Assignment Help. What is it and how does it affect a calculation? Learn these facts in detail from our website 24x7assignmenthelp.com.
What is diminishing balance method?
Depreciation isn’t directly charged in the expense account rather it slowly cuts off the value from profit and loss account as the asset’s life span turns to zero. In diminishing balance method, a fixed percentage is charged from the value of that asset every year. Each year that value starts to reduce. This is why this is called reducing value method.
From Diminishing or Reducing or Written down Value Method Assignment Help you can find that there is some similarity in this method and straight line method. But the main difference is that in this process, you will have to cut off the value from a reduced balance of last year with a fixed percentage rather than cutting same value as last year as in straight line method.
Reason behind its wide acceptance:
There is a specific reason behind its acceptance. In Diminishing or Reducing or Written down Value Method Assignment Help you can see that it’s a perfect process of calculating depreciation on assets that have higher maintenance charges over the years. In those cases, straight line method seems to be incorrect.
Since there is a large sum of amount diminished from account table every year, this method seems to make calculation for assets that can turn obsolete easy. But you must remember one thing, like straight line; here the value of that asset won’t turn into zero. This method is highly recommended for plants, boilers, buildings and also machineries.
Pros of this method:
- Every year the amount of depreciation is less than last year.
- Income Tax authorities have approved this method.
- You can find equal reduction in an asset’s serving capability and its depreciation amount.
- It helps in minimizing risk of obsolescence since this method will cut off larger sum from the value in earlier years.
Cons of this method:
- This method has a bad reputation on placing unnecessary importance in historical cost of that asset.
- In Diminishing or Reducing or Written down Value Method Homework Help you can see that there is no mention upon interest on capital invested on that asset.
- This method becomes difficult with addition and disposal of that asset.
- The value of that asset never turns to zero.
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