Depreciation Accounting

Depreciation is the reduction in the value of an asset over time due to wear and tear, obsolescence, or other factors. Depreciation accounting is the process of allocating the cost of an asset over its useful life.

Methods of Depreciation Accounting

There are various methods of depreciation accounting, including straight-line method, declining balance method, sum of years digits method, and units of production method. Each method has its own advantages and disadvantages, and the choice of method depends on the nature of the asset and the financial reporting requirements.

Sum of Years Digits Method

The sum of years digits method is a depreciation method that allocates a higher amount of depreciation in the early years of an asset's life and a lower amount in the later years. The formula for calculating depreciation under this method is:

Depreciation expense = (Cost of asset - Salvage value) x Remaining useful life / Sum of years digits

Where:

- Cost of asset is the original cost of the asset
- Salvage value is the estimated value of the asset at the end of its useful life
- Remaining useful life is the number of years the asset has left before it becomes obsolete or no longer useful
- Sum of years digits is the sum of the digits of the useful life of the asset.

Example

Let’s assume an asset has a cost of Rs. 1,00,000, a useful life of 5 years, and a salvage value of 10%.

- The sum of years digits would be 15 (i.e. 5+4+3+2+1)
- In the first year, the depreciation expense would be (1,00,000-10,000) x 5/15 = Rs. 26,667
- In the fourth year, the remaining useful life would be 2 years, and the depreciation expense would be (1,00,000-10,000) x 2/15 = Rs. 12,000

Answer

Therefore, the depreciation for the 4th year under the sum of years digits method would be Rs. 12,000 (option 4).