Depreciation of Various Assets
Depreciation of Various Assets:
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.
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 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.