The straight-line depreciation formula Essay

Sum of the Year ‘s Digits usage accelerated depreciation methods are more relevant and, in most instances, accurate. They assume that an plus loses a bulk of its value in the first several old ages of usage. Straight line depreciation is calculated by taking the purchase or acquisition monetary value of an plus subtracted by the salvage value divided by the entire productive old ages the plus can be moderately expected to profit the company. The set of histories which is more accurate are in Sum of Year Digits method as the depreciation is calculated each and every year.It involves set uping at the point of the rental, the no of leases that are collectible and ciphering the amount of figures. Finance charges are involved in this where the amount of figures can be calculated. Straight Line Method is allocated every bit over the lease term. It is merely allowed where finance charge sum is immaterial where usually this method is non used. It involves ciphering the entire finance charge for the term of the rental and allocating this on a consecutive line footing over the full rental term. In this method the truth rate are less compared to the consecutive line method. The net net income in Sum of digit method is more accurate. The company public presentation is good and sound.

Ans ( D ) : – In the first instance IAS 17 is used.It is to order, for leaseholders and lease givers, the appropriate accounting policies and revelations to use in relation to Finance and operating rentals. The Straight-line depreciation is a method of accounting where the figure of old ages the point is traveling to be used and the re-sale value of the point are determined. Using these preset sums, straight-line depreciation uses the undermentioned expression: ( monetary value of the point – re-sale value of the point ) /number of old ages the point is used. There are some drawbacks to utilizing this method of depreciation, but there are besides benefits.

Consistency and Control

The straight-line depreciation expression does non hold any variables that are outside of your company ‘s control.MACRS ( modified accelerated cost recovery system ) , the IRS has a say in the recovery period of your company ‘s specific belongings.

Under IRS guidelines, autos are assigned a five-year recovery period, and office furniture is assigned a seven-year recovery period. Unlike the standard milage rate for an car, which changes each twelvemonth, straight-line depreciation is one of the few methods of depreciation your company can utilize where all of the factors in the expression are consistent and in your control.


Straight-line depreciation is a comparatively easy expression to understand, and it is besides easy to account for in your books. The depreciation value is the same each twelvemonth ; you do non hold to calculate a new rate as you do when the IRS publishes alterations to the stay. The lone clip you may hold to change your Numberss is if you exceed the IRS upper limit allowable depreciation for a given twelvemonth.

Salvage ( Re-sale ) Value

Straight-line depreciation predetermines re-sale value. After an plus is used for five old ages, it is normally still deserving something. Straight-line depreciation histories for that and provides a more accurate word picture of the plus ‘s true worth. This is particularly true for autos, which normally have a salvage value. If the plus does non hold a salvage value, a 0 can be entered in the expression in topographic point of the re-sale value, and the straight-line method can still be used.

The disadvantages of Straight Line Depreciation are: –

When add-ons are made to plus computation are required for each plus holding a different here it assumes the plus will estimated life clip.

It does non take into history the cost by manner of involvement on the money invested.

Actual depreciation wear and tear of the machine downtime in the ulterior old ages is likely to be more than the earlier old ages which is non recognized by this method.

Sum of Digits method is an accelerated depreciation method, where it assumes the plus will lose the bulk of its value in the first few old ages of its utile life.It is based on purchase monetary value, salvage value and old ages of utility. To cipher depreciation with this method, find the depreciation fraction, which is the plus ‘s entire old ages of life still left divided by the amount of all the old ages. For illustration, if the plus ‘s life is 5 old ages, divide the old ages still left by the undermentioned amount: 1+2+3+4+5. The general expression for the amount of the twelvemonth is 1+2+3+4+ … +n, where N is the plus ‘s entire life. Once you have the value of the fraction for each twelvemonth, multiply it by the difference between the cost of the plus and its salvage value. The consequence you get each twelvemonth is the depreciation for that twelvemonth.

Disadvantages of utilizing Sum of Year Digits Method:

Sum-of-years ‘ figures depreciation method is seldom used in pattern. Its usage is preponderantly in the fiscal and regulated industries. It is most normally applied to intangible assets, specifically to client relationships.

Write off in assets are more because the depreciation value reduces about the dual every twelvemonth due to which the assets are written off at an early phase.

Advantages of utilizing Sum Of Year Digit Method: –

Sum-of-years ‘ figures is an acceptable depreciation method a in fiscal coverage under U.S. by and large accepted accounting rules ( GAAP ) .

It shows studies both across companies and within given companies. It means its utile for keeping companies and subordinates. It show that the primary application is to specific intangible plus classs in the fiscal and regulated industries.

It is most easy applied if the company has a policy of apportioning depreciation on assets acquired during the period on a whole-year footing.

The Acturial method allocates involvement to each period.It maintains the changeless rate on the outstanding amount.It uses the involvement rate implicit in the lease.It is done in fiscal rental.

Advantages of actuarial method: –

The cost attack calculates entire concluding benefits based on several premises, including the rate of pay additions and when employees will retire.

The sum of support that will be needed to run into those future benefits is so determined. The benefit attack finds the present value of future benefits by dismissing them.

In Physical completion the building and undertaking finance, are the method for ciphering net incomes and losingss in which gross is recognized as it is received, provided that it is prorated harmonizing to the per centum of the undertaking that is complete. This differs from the completed-contract method, which merely recognizes grosss after the physical completion of the contract.

Surveyor method is where the completion of the work and the enfranchisement of the work is done by the surveyor.In this the per centum of enfranchisement is done.The location of the contract is besides certified.

It is good as the sum of contract gross is determined from surveyors method.

The phase of completion is besides determined through this.

The method is used to find the contract gross recognised in the period.

They can besides rede clients on the best manner to gain from a finished undertaking, any hereafter costs from care that may happen, and aid clients get down new building undertakings

The disadvantages of the contractor can find the gross or loss in the contract beforehand.

Cost Method

The points below highlight the cost method of accounting for investings specifically and non the general method of cost accounting that are used in the internal house merchandise or service costing ( accounting ) .

The original cost of the investing, that is the historical cost which was paid for the investing, when it was first bought, is the 1 that is recorded in the balance sheet.

Once the balance sheet entry has been made, no farther accommodations and alterations are required to be made, unless the just market value of the investing drops to such an extent that there is uncertainty over any sort of possible recovery. Under such a circumstance, a lasting write off of the investing is made.

If any dividends are declared on the investing in inquiry, the dividends are recoredd like normal dividends and the usual accounting entries are passed for the same.

Any undistributed net incomes on the investings are non recorded in the proprietor ‘s balance sheet and hence have no consequence on the concluding balance sheet, per Se.

The consolidation procedure under the cost method of accounting requires that both, the investing history and the dividend history, be eliminated wholly when the parent and the subordinate consolidate their histories. You can utilize accounting package to assistance with the consolidation procedure.

It is of import to observe here that no affair which method of accounting is used ( cost or equity ) , the amalgamate fiscal statements

In the 3rd one IAS 10 is followed as the chief end of this is to set its fiscal statements for the events after the balance cheet and that an entity should give about the day of the month when the fiscal statements were authorized for issue and about events after the balance sheet.Some events are favorable and the other are infavourable. Events can be identified when the fiscal statements are authorized for issue.

Adjust fiscal statements for seting events: events after the balance sheet day of the month that provide further grounds of conditions that existed at the balance sheet, including events that indicate that the traveling concern premise in relation to the whole or portion of the endeavor is non appropriate. They dont adjust for non seting events or events where the conditions arose after the balance sheet day of the month. [ IAS 10.10 ]

If an entity declares dividends after the balance sheet day of the month, the entity shall non recognize those dividends as a liability to the balance sheet day of the month. That is a non adjusting event.

IAS 37 is to guarantee that stairss and standards measuring bases are applied to commissariats, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to the fiscal statements to enable users to understand their nature, timing and sum. The rule is to set up the Standard that a proviso should be recognised merely when there is a liability which is present in the duty ensuing from past events. The Standard therefore ensures that merely right instances are dealt with in the fiscal.In this the opportunities of the incidence should be taken into consideration.There should non be any sort of purposefuuly doing up a scene. An entity must see the proviso if

The present duty ( legal or constructive ) has arisen as a consequence of a past event

payment is likely (

the sum can be estimated faithfully.

An obligating event is an event that creates a legal or constructive duty and, hence, consequences in an entity holding no realistic option but to settle the duty.

A constructive duty arises if past pattern creates a valid outlook on the portion of a 3rd party, for illustration, a retail shop that has a long-standing policy of leting clients to return ware within, say, a 30-day period.

A possible duty ( a contingent liability ) is disclosed but non accrued. However, revelation is non required if payment is distant.

In rare instances, for illustration in a case, it may non be clear whether an entity has a present duty. In those instances, a past event is deemed to give rise to a present duty if, taking history of all available grounds, it is more likely than non that a present duty exists at the balance sheet day of the month. A proviso should be recognised for that present duty if the other acknowledgment standards described above are met. If it is more likely than non that no present duty exists, the entity should unwrap a contingent liability, unless the possibility of an escape of resources is distant.

The sum recognised as a proviso should be the best estimation of the outgo required to settle the present duty at the balance sheet day of the month, that is, the sum that an entity would rationally pay to settle the duty at the balance sheet day of the month or to reassign it to a 3rd party.This means:

Commissariats for one-off events ( restructuring, environmental clean-up, colony of a case ) are measured at the most likely sum.

Commissariats for big populations of events ( guarantees, client refunds ) are measured at a probability-weighted expected value.

Both measurings are at discounted present value utilizing a pre-tax price reduction rate that reflects the current market appraisals of the clip value of money and the hazards specific to the liability.

In making its best estimation, the entity should take into history the hazards and uncertainnesss that surround the implicit in events.

If some or all of the outgo required to settle a proviso is expected to be reimbursed by another party, the reimbursement should be recognised as a separate plus, and non as a decrease of the needed proviso, when, and merely when, it is virtually certain that reimbursement will be received if the entity settles the duty. The sum recognised should non transcend the sum of the proviso.

In mensurating a proviso consider future events as follows:

prognosis sensible alterations in using bing engineering

ignore possible additions on sale of assets

see alterations in statute law merely if virtually certain to be enacted