In diminishing balance method, depreciation is calculated on book value of the asset at the start of the year instead of principle amount with fixed percentage. In this, the percentage is same but depreciation amount gradually decreases as it is done on book value.FormulaDepreciation amount = (book value * rate of depreciation)/100Some of the merits of diminishing balance method are as follows −Recognised by income tax authorities.Minimises impact of obsolescence.Depreciation amount decreases year by year.Suitable for assets where scrap value equals to zero.Some of the demerits of diminishing balance method are as follows −Asset value can be zero.Interest is not ... Read More

Cost of the equipment = Rs. 10, 00, 000 Salvage value = Rs. 75, 000 Useful life = 8 yearsSolutionThe solution is given below −Step 1 − Calculate depreciation rate using straight line method.Depreciation rate using straight line method = 1/useful life => 1/8 => 12.5%Step 2 − Multiple depreciation rate in step 1 with 2 to get accelerated depreciation rate Accelerated depreciation rate = 2*12.5% => 25%Step 3 − Prepare depreciation table using double decline methodYearCost of the equipment at the start of the year (Rs)Depreciation rate (%)Amount depreciated RsBook value at the end of the year (Rs)1100000025250000750000275000025187500562500356250025140625421875442187525105468.75316406.255316406.252579101.5625237304.68756237304.68752559326.171875177978.515637177978.515632544494.6289075133483.88672Book value ... Read More

As the name suggest double declining, the asset is depreciated twice the rate than straight line method. It is also called accelerated depreciation. It does not mean depreciation is higher, it depreciates higher amount in initial years of asset and gradually depreciation expenses decrease in later years of the asset as compared to straight line depreciation.FormulaDouble decline balance method = 2 * cost of the asset * depreciation rateDouble declining balance method = 2 * (cost of the asset/useful life)Steps to calculate double declining method are as follows −Cost of asset (initial cost).Calculate salvage value.Determine life of the asset.Calculate depreciation ... Read More

SolutionThe solution is given below −Cost of machine = Rs. 200000 Salvage value = Rs. 25000 Total life = 8 yearsFormulaStraight line depreciation = (ADE) / (CA –SV)Here ADE = Annual depreciation expenses, CA = Cost of the asset, SV = Salvage valueFirst method (using salvage value)Cost of the asset – salvage value = 200000 – 25000 => 175000Annual depreciation = ((cost of the asset) – (salvage value))/life of machinery            = 175000/8            = 21875So by above calculations Rs. 21, 875 will be depreciated from 200000 annually for 8 years.Second method ... Read More

Straight line depreciation is the simple way to calculate depreciation. In this, a fixed amount is deducted from each accounting year of a firm. In straight line depreciation, firm depreciates equal amount from principle amount of an asset annually over its useful life. That means, every accounting year there will be change in asset value in balance sheet.FormulaStraight line depreciation = (cost of the asset – salvage cost) * depreciation rateStraight line depreciation = (cost of the asset – salvage value)/useful life of an assetStraight line depreciation for partial years = D * (Number of months/12)Where D is depreciation amount ... Read More

Depreciation means gradual decrease of value of a tangible asset over a period of time. All tangible assets tend to depreciate. Machinery, equipment, furniture etc. except land.Land tends to appreciate over the years than depreciate. The amount which is depreciated or carrying value of an asset is called salvage value.Criteria in depreciation is as follows −Cost of the asset.Residual/salvage value of the asset.Useful life of the asset.Appropriate method.The main purpose of depreciation is to measure income generated from assets, determine real value of assets, tax benefits and deductions, expenditure incurred in the production. Main causes for depreciation are wear and ... Read More

This part of statement focus on raise of capital and pay back to investors through capital markets. Financial activities include −Repayment of equity.Payment of dividends.Issuance and repayment of debt.Capital lease obligations.If the statement shows the positive, that means, there is an increase in its assets. If the statement shows negative, then the company of its long term debts or dividends.FormulaCash flow from financing activities = cash inflow from issuing debt/equity – (Cash paid as dividends + repurchase of debt and equity)Financial activitiesPositive cash flowNegative cash flowIssuing equity/stockStock repurchasesBorrowing debtDividendsIssuing debtsPaying down debt

This statement tells about how much is generated from investment related activities of a firm. Investments may be long term or short term. Investments includes assets, securities etc.Examples of investing activities are as follows −Purchase of investments.Proceeds from the sale of investments.Purchase of fixed assets.Proceeds from the sale of fixed asset.Investing activities does not includes −Interest payments or dividends.Debt, equity.Deprecation of capital assets.All.Investing activitiesPositive cash flowNegative cash flowSales of fixed assetsPurchase of fixed assetsSale of investment instruments (stocks and bonds)Purchase of investment instruments (stock and bonds)Collection of loansLending of loansInsurance settlementsRead More

Operating cash flow is the money generated by a firm to perform its regular operations in a specific period of time. It tells about the operational health of the firm. If a firm generates positive cash flow, it means that the firm can’t remain solvent in long run. If the firm generates negative cash flows, it should have some financial support to meet the needs or to raise its additional capital.FormulaOperating cash flow = operating income + depreciation – taxes (+/-) change on working capitalOperating income = revenue – cost of salesPurpose of operating cash flow is explained below −To ... Read More

Single step income statements represent company’s revenues, expenses and income in simple way. It is easy to calculate as not many steps are involved. Small companies, sole proprietorships uses this kind of statements often.FormulaNet income = revenues – expensesAdvantages are given below −Firm prepares sing step income statement to analyse departmental performance in a period.Easy to prepare.Easy to analyse.Use for internal purpose.Limitations are explained below −Chances of deviation of net income.Actual expenses are not known.Doesn’t calculate gross profit.ExampleThe example is given below −Income statement of XYZ company As on 31st March xxxxRevenue and gains (A)Rs.Sales revenue150000Interest revenue25000Gain on sales of ... Read More