Depreciation Methods and their Applicability based on Repairs and Maintenance Cost

Depreciation is a process of allocating the cost of a long-term asset to the periods that benefit from its use. There are several methods of depreciation like Straight Line Method, Sinking Fund, Annuity, Reducing balance, etc. Each method of depreciation is appropriate for specific assets and their patterns of usage.

Straight Line Method

The straight-line method of depreciation is the most commonly used method. It is applicable when the repairs and maintenance cost of an asset does not increase as it grows old. It assumes that the asset depreciates at a constant rate over its useful life. This method is simple and easy to apply.

Sinking Fund

The sinking fund method of depreciation is applicable when the repairs and maintenance cost of an asset increases as it grows old. The sinking fund method involves setting aside money each year to replace the asset when it reaches the end of its useful life. This method requires a lot of calculation and is suitable for assets that have a long life, such as buildings and machinery.

Annuity

The annuity method of depreciation is also applicable when the repairs and maintenance cost of an asset increases as it grows old. The annuity method involves calculating the depreciation expense each year as if it were an annuity. This method is suitable for assets that are expected to have a long life, such as buildings and machinery.

Reducing Balance

The reducing balance method of depreciation is similar to the sinking fund method, but it involves applying a fixed percentage of the asset's value each year. This method is suitable for assets that have a high repair and maintenance cost in the early years of their life, such as vehicles and equipment.

Conclusion

In conclusion, the most appropriate method of depreciation depends on the nature of the asset and its pattern of usage. If the repairs and maintenance cost of an asset increases as it grows old, the sinking fund, annuity, and reducing balance methods of depreciation are more suitable than the straight-line method.

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