In the first part, three(3) methods have been mentioned namely the Straight Line Depreciation, Reducing Balance Depreciation and the Sum of Digit method.
In this final part, we shall discuss another three(3) methods for accounting for depreciation of fixed assets:
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REVALUATION METHOD |
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· Normally used for calculating depreciation of items such as loose tools and farmers’ livestock where it is difficult to estimate with any certainty the rate at which the asset will depreciate and
· The fixed asset is valued at the end of the accounting period. The difference between the value at the end of the period and the beginning of the period will be the depreciation for that period.
· Sometimes the value of the fixed assets may be inflated by new purchases of assets and these purchases need to be taken into consideration for calculating depreciation.
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FORMULA FOR REVALUATION METHOD: Depreciation =Value of asset at the end – Value of asset at the beginning + Any new purchases |
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DEPRECIATION SINKING FUND METHOD |
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You will notice that for all previous methods mentioned like straight line, reducing balance, sum of digits and revaluation there is no specific arrangement for CASH to be set aside for replacement of the asset at the end of its useful life.
· However, for this method, it involves the investment of cash OUTSIDE THE BUSINESS. The aim is to make regular investment of money in securities and to accumulate interest or dividends in order to finance the replacement of the assets.
· Note that the cash to be invested each year is ascertained by reference to compound interest table. |
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DEPRECIATION FUND WITH ENDOWMENT POLICY METHOD |
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· This method is similar to the above Sinking Fund method EXCEPT that instead of investing in securities the amount set aside each year is used to pay premium on an ENDOWMENT POLICY. The policy should mature on the date on which the asset ceases its useful life. The money collected would be used to replace the expired asset. |