It is the simplest and most often used technique. The components used to calculate Straight Line Method are:

Formula to calculate:

Depreciation = (Cost of Asset-Estimated Scrap Vale)/Estimated life of Asset in years

The main advantage of this method is that an equal amount of depreciation is charged every year throughout the life of the Asset which makes the calculation of depreciation easy.

But the limitation of this method is that the amount of depreciation charged on the asset in the later years is high due to the reduced value of the asset.

In Written Down Value Method, the rate of depreciation is predetermined. This is done by deducting the amount of depreciation charged before from the balance of cost of asset (Cost of Asset-Estimated Scrap Value). In simple words, in the first year the amount of depreciation charged is high and it gradually starts decreasing during the subsequent years.

Formula to calculate:

Depreciation = 1- 

N= number of years

R= Residual/Scrap Value

C=Cost of the asset

The main benefit of this method is that it recognises this fact that in the initial phase of an asset, costs of maintenance, repairs etc. are less which goes on increasing with the progressing life of the asset. Thus, by charging higher amount of depreciation in the initial years and gradually decreasing the amount of depreciation counterbalance both the lower amount of repairs and maintenance cost in the initial years and the gradual increase later on. It can be noted here that the written down value can never be zero.

Production Unit Method is also a method of calculating depreciation. According to this method, rate of depreciation is predetermined at per unit, which is calculated on the basis of total number of units produced during the life of the asset. This method gives more importance to the usage factor. Higher the number of units produced, higher will be the amount of depreciation and vice versa.

Formula to calculate:

Rate of Depreciation per unit = (Cost of machine – Estimated Scrap Value) / Estimated number of units produced

In this method, the purchase of an asset is considered an investment of capital on which a certain rate of interest is earned. The cost of the asset and the interest are written down annually by equal instalments until the book value of the asset is reduced to nil. 

The annual charge by way of depreciation is found out from the annuity tables. The annual charge for depreciation will be credited to asset account and debited to depreciation account while the interest will be debited to asset account and credited to interest account. The disadvantage of this method is that it is a complicated method to charge depreciation. Secondly, the burden on Profit and Loss account goes on increasing with the passage of time and the amount of interest goes on diminishing as years pass by. 

Thus this method is best suited to those assets which require considerable investment and don’t require frequent additions.

This method is also used to calculate amount of depreciation. In this method the depreciation is provided partly at a fixed rate on time basis and partly at a variable rate on usage basis.

It is also known as Depreciation fund method. Under this method a sinking fund or depreciation fund is created. Every year the profit and loss account is debited and fund account is credited with a sum, which is calculated such that the annual sum credited to the fund account which is accumulating throughout the life of the asset will be equal to the sum required to replace the old asset. The main advantage of this method is that it accumulates interest or dividends by regular investment of cash outside the business e.g.in securities to finance the replacement of the assets, which has become useless. 

But on the other hand this method has disadvantage also as the burden of profit and loss account goes on increasing as years pass by since the amount spent on repairs and maintenance goes on increasing due to the wear and tear of the asset and the amount of depreciation remains same.

This method is similar to Sinking Fund method except in this method instead of investing in securities the amount set aside is used to pay premium on an Endowment Policy. And the policy should mature on the date on which the ceases its useful life. This collected money is then used to replace the expired asset.

According to Income Tax Act, 1961 Written Down Method of depreciation is used to calculate the tax liability. In this method, depreciation is charged at predetermined rate, which is calculated on the balance of cost of asset less amount of depreciation previously charged. The rate at which the depreciation will be calculated is also specified in the Income Tax Act 1961.

As per Schedule XIV of Companies Act, 1956 the company can calculate the depreciation by using either Straight Line Method or Written Down Value Method. 

The rate to calculate depreciation is also specified in Schedule XIV. If any addition has been made to any asset during the financial year, depreciation on such an asset will be calculated on pro-rata basis from the date of such addition or upto the date on which such asset has been sold.

To calculate depreciation as per Schedule XIV of Companies Act, 1956 the fixed assets are categorized as below:

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