Departmental overheads used in machine hour rate of depreciation are classified into following types −FixedVariableFixed charges − These are constant charges irrespective of machine hours. Rent, taxes, insurance, general expense etc.Some of the fixed charges are as mentioned below −Fixed expensesBasisRentFloor area occupied by machineInsuranceBased on capital value of machineSupervisoryExpenses to supervisory staffHeatingBased on technical estimatesGeneralEqual to all other machinesLubricantsNature of machineVariable charges − These charges are different from machine to machine. Depreciation of machine, maintenance charges, power etc. are variable charges.Depreciation of machineMachines consists of both fixed and variable parts of depreciation, but calculating them separately is difficult, so ... Read More

Machine hour rate is called as service hour method. In this method, active hours of machine are taken into account for calculation of depreciation. This method is commonly used in sectors like chemicals, steel and other heavy industries.In this method, machine hour rate is established and charged to production. Machine hour rate means the amount spent on machine to run for an hour.Formula            (Depreciation rate) hourly = (Cm-SVm)/ELm    Here Cm = cost of machine, SVm = scrape value of machine and Elm = estimate life of machine             (Depreciation)Annual ... Read More

The mileage method of depreciation is carried out on vehicles (cars, buses, etc.). In this method, depreciation is calculated based on number of kilometres travelled by the vehicle and asset means vehicle.FormulaDepreciation amount = (Ca-SVa) / TLaHere, Ca = cost of asset, SVa = scrap value of asset, TLa = total life of the asset.This method is applied if the following conditions are met −Asset life can be calculated in kilometres.Asset life is certain.ExampleA firm purchases an asset worth of Rs. 1500000/- and scrape value is Rs.200000/-. Expected life of an asset will be 150000 KMS. The asset travelled 8000, ... Read More

Composite depreciation claims depreciation expenses by depreciates group of related assets into single entity than individual. Composite depreciation is the application of straight-line depreciation. If the asset is sold, then account entry is debited to cash and credited to fixed asset. The difference between original cost and sold cost is debited to accumulated depreciation. In composite method, no loss or no gain on sale of fixed asset is recognized.Steps to calculate composite depreciation are as follows −Accumulation of total depreciation cost of assets.Allocate single useful life for asset group.Yearly depreciation = useful life/ total depreciation.Document the depreciation.ExampleCalculate depreciation using composite ... Read More

The major differences between working capital and fixed capital are as follows −Working capitalFixed capitalUsed for daily business activities.Used for long term benefits.Acquires current assets.Acquires non-current assets.If needed, these can be converted into cash immediately.If needed, these can’t be converted into cash immediately.It has liquidityIt has no liquidity.Serves short period of time.Serves long period of time.Less than one accounting period.More than one accounting period.Operational based.Strategy based.Company needs working capital for operations.Company consumes indirectly.

Revaluation method of depreciation is the easiest method of depreciation. In this method, the asset value is assessed at the staring of the year and at the end of the year and difference between them is considered as depreciation to be charged. Revaluation method of depreciation will be done on fixed assets. Revaluation can be done by external party (professional) or internally.FormulaDepreciation expenses = (AV)sy + A – D – (AV)eyHere, (AV)sy = asset value at the start of the yearA = any additions during the yearD = any deductions during the year(AV)ey = Asset value at the end of ... Read More

The major differences between sinking fund depreciation and annuity method of depreciation.Sinking fund depreciationAmount generated through depreciation is invested in market securities.Funds available for replacement of assets.First entry of interest will be made at the end of second year.Sinking fund table is used to calculate depreciation.Cost – interest = depreciation charged.Interest increases with years.Asset value is same.Effect on P&L is same.Annuity method of depreciationAmount generated through depreciation is not invested in market securities.Funds not available for replacement of funds.Interest will be earned from starting day onwards.Annuity table is used to calculate depreciation.Cost + interest = depreciation charged.Interest decreases with years.Asset ... Read More

SolutionThe solution is as follows −                    Journal entriesDateParticularsDrCr1-1-2000Lease accountTo Bank account(Being purchase of lease)250000250000Depreciation fund policy accountTo Bank account(Being the annual premium paid)450004500031-12-2000Profit and loss accountTo depreciation fund account(Being annual depreciation charge)45000450001-1-2001Depreciation fund policy accountTo bank account(Being annual premium paid)450004500031-12-2001Profit and loss accountTo Depreciation fund account45000450001-1-2002Depreciation fund policy accountTo bank account(Being annual premium paid)450004500031-12-2002Profit and loss accountTo Depreciation fund account(Being annual depreciation charged)4500045000Bank accountTo Depreciation fund policy A/c(Being policy money realized on maturity)250000250000Depreciation fund policy accountTo Depreciation fund account(Being profit transferred to fund)115000115000Depreciation fund accountTo old lease account(Being closure of fund ... Read More

Insurance policy method is just like sinking fund method of depreciation, but in this method, the money is used to pay premium for insurance company. Premium will be charged at the start of the year. Money at the end of maturity can be used to buy a new asset.                    Journal entriesDateParticularsDrCrXX/XX/XXXXInsurance policy A/cTo cash A/cTo sinking fund A/c(Being premium paid at the end of the year)XXXXXXXX/XX/XXXXProfit and Loss A/cTo Depreciation A/c(Being Depreciation is charged)XXXXXXXX/XX/XXXXCash A/cTo insurance policy A/c(Being money received on maturity)XXXXXXXX/XX/XXXXInsurance policy A/cTo Depreciation fund A/c(Being Transfer of excess amount ... Read More

SolutionThe solution is explained below −Using the annuity tableRate for 4% for 10 years will be 0.130Annual depreciation charge = 200000 * 0.130 => 26000                    Lease accountDebit sideCredit sideYearYear1To cashTo interest20000080001920001By DepreciationBy Balance c/d260001660001920002To balance b/dTo interest16600066401593602To DepreciationTo balance c/d260001333601593603To balance b/dTo interest13336053341280263To DepreciationTo balance c/d260001020261280264To balance b/dTo interest1020264081979454To DepreciationTo balance c/d2600071945979455To balance b/dTo interest719452878690675To DepreciationTo balance c/d2600043067690676To balance b/d43067Year 1Debit side: Cash – interest => 200000 – (200000*4%) => 200000 – 8000 => 192000Credit side: 192000 – Depreciation amount => 192000 – 26000 => 166000Year 2Debit side: balance – interest ... Read More