Double Declining Method

In Double Declining Method two times the straight line depreciation is used. It is form of accelerated form of depreciation whereas higher depreciation is charged in earlier years of life of asset similarly to accounting benefits are received from the asset.

Explanation

Double declining method depreciates the asset faster than straight line method. But it uses that is it employs figure of Net Book value in relation to the Asset to depreciate the asset rather than its cost. It would depreciate the asset twice as much as under straight line method. Although the depreciation is higher in relation to the earlier years however, the total amount and charge of depreciation pertaining to the entire the asset useful life of asset will not change at all. The double depreciation rate usually held constant and is applied in relation to the asset net book value in real-time. This depreciation approach is appropriate for below assets.

a)   To get tax benefit from an asset early. As the depreciation expense will be higher in earlier years the overall net profit for those years will be lower. Which will give rise to lower tax in those years?

b)   When economic benefits in relation to the initial and earlier years in relation to the asset useful life are higher in comparison to those yield in the latter useful life years. The assets like advance technological equipment will lose it value quickly as these assets have a smaller life cycle. New technology obsoletes these assets quickly as new technology is introduced in these fields very quickly.

Under GAAP (generally accepted accounting principles) expenses in relation to the specific accounting period and asset are compared to the related revenues. When an asset is purchased by a business it deducts the cost of an asset from revenue over many years rather deducting the all the cost from its revenues at once. So when economic benefit from an asset is higher in earlier year’s double declining method is used to depreciate that asset. Calculating depreciation in Double Declining Balance Depreciation can be a bit tricky as compared to the traditional technique of computing depreciation charge that is straight line method. In order to calculate the charge for depreciation by employing technique of Double Declining Balance, following formula is used and applied to the data.

Periodic Depreciation Charge

2*R*C

In relation to the above formula, R represents the rate of depreciation pertaining to the technique of straight line method pertaining to the computation of the periodic depreciation charge. However, C is represents the net book Value which is the computed carrying value of the very same asset at the commencement of the specific period of accounting. When accumulated depreciation is deducted from the cost of an asset we get Net book Value.

Example 1

An asset that was effectively purchased bearing date 1^st July 20X1. The cost that was paid amount to $900,000, however, the residual value was assessed to be zero subsequent to the end of the asset estimated nine years useful life. Two times 10% Straight line rate would be used to compute the depreciation charge in the case of employment of the double declining method in relation to the computation of the same. Instead of the multiplying this factor to the cost, the figure of the net carrying amount at the commencement of the specific accounting period will be used. On the conclusion of the first year in relation to the asset use, the book value is standing at $900,000. Multiplication of the same value to the factor of 20% for the above cited reasons will yield the depreciation charge in relation to the first accounting period. The depreciation charge turned out to be $180,000. The book value at the conclusion of the 2^nd year turned out to be $720,000 and the multiplication of the same with the constant factor that is 20% double declining rate will yield depreciation charge in relation to the second reporting period and likewise depreciation charge will be computed for each of the subsequent year.

Example 2

Ahmed Electronics Company made purchase in relation to a machine bearing catalogue price at $600,000. Estimated figures in relation to the residual value and useful life are $10,000 and five years respectively. Calculate the depreciation charge in relation to the first three years employing the technique of Double Declining Balance method.

Years	Net Carrying Amount ($)	Rate*	Depreciation Charge	Accumulated Charge
1	50,000	40%	40%*50,000=20,000	20,000
2	30,000	40%	40%*30,000=12,000	32,000
3	18,000	40%	40%*18,000=7,200	39,200

Reducing Balance Method

                             

Definition

In reducing balance of depreciation method there will be greater charge in relation to the depreciation expense in the initial years in comparison to the same charge during the later years of the useful life. The depreciation percentage is periodic charged on the computed balance after the depreciation is deducted from cost of the asset. This method is also called accelerated depreciation method as higher cost in relation to the asset is depreciated in the initial and earlier years pertaining to the asset useful life and lower is charged as an expense in later years.

Explanation:

It is important to note that under the umbrella of the reducing balance method in relation to the computation of the depreciation expense, the depreciation charge pertaining to the final period of the useful life is essentially equal to the difference between the then Net book at the commencement of that particular accounting period and the scrap value assessed by the management at the point of time of putting that specific asset to use. This will be a verification pertaining to the accounting of the whole of the depreciation charge for that particular asset. The primitive feature of reducing balance method is that the depreciation expense is contained in each of the subsequent period of use of the asset. Taking into account the capacity to generate the cash flows, an interesting point that will be revealed from this analysis would be that the asset would generate higher cash flows in the beginning half of the useful year in comparison to the later years of the very same asset.  

How to calculate depreciation by reducing balance method

(Net Carrying Amount – Assessed Residual Value) x Percentage Rate of Depreciation Rate

Aforementioned formula will be applied in relation to the computation of the annual depreciation charge. In the above formula, Net Carrying amount is the asset value at the commencement of the specific accounting year. In order to calculate it, accumulated depreciation needs to be deducted from the Asset value. The second term in the formula is Assessed Residual Value. Precisely, it is the amount which would be expectedly realized in the event of the selling of the asset subsequent to the consumption of the whole of its useful life. This is amount which is not depreciated as it is expected that this amount which will be received by its sale not by the use of asset. Depreciation Rate precisely the rate which defines the pattern in which economic benefits in relation to an asset would be expectedly consumed over the useful life pertaining to this very asset.

Which Assets to be depreciated under Reducing Balance Method
This method of depreciation yield useful pattern in relation to the analysis of the asset use. The depreciation charge yields higher value in relation to the initial and earlier useful life years in comparison to the lower charge for the latter half of useful life. Illustratively, I.T gadgets and equipments, computers have greater utility in the earlier years of its useful life. I.T equipment and computers becomes obsolete in a few years. I.T and computers products have a smaller life cycle. The technological advancement in this industry is very fast. New technology replaces the old technology very quickly. So employing the technique of reducing balance method ensures that depreciation charge corresponds to how economic benefits from these kinds of assets are consumed.

Example 1

The useful life in relation to the specific asset is 3 years and the asset is bearing cost amounting to $5,000. The assessed value in relation to the asset residual value is $1,000. Last but certainly not the least, the rate of the depreciation charge would be 25% and the company resolved in the favor of the reducing balance method in relation to the computation of the depreciation charge.

Depreciation expense in relation to the four years is tabulated below:

Year	(NBV-R.V)*Rate	Depreciation	Accumulated Depreciation
1	(5000-1000)*25%	1,000	1,000
2	(4000-1000)*25%	750	1,750
3	(3250-1000)*25%	562	2,312
4	(2688-1000)*25%	1,688*	4,000

*The 1688 last year depreciation is in fact difference pertaining to two values. Firstly, asset book value at the point of the commencement of specific period of accounting and secondly the assessed residual value or alternatively the scrap value. This step yields assurance regarding the complete depreciation of the asset.

Absorption Costing

Absorption Costing system is an alternative technique to the Marginal costing technique of accumulating and reporting costs. The absorption costing is based on the premise that it is appropriate to account for all the production costs whether they are direct costs or alternatively they are indirect costs. On the other hand, marginal costing is all about accumulating such costs that vary with the production volume and are classified as the variable costs. Absorption costing is approved and preferred technique by the accounting standards applied in relation to the preparation of the financial statements. Stated differently, absorption costing takes into account all the fixed as well as the variable costs that are incurred in relation to the production. The costs are not debited and charged to the cost of the goods sold right away but is retained until the good are effectively sold and the related revenue is charged in the accounts.

Cost Components under the Absorption Costing

Direct Material

It is the foremost production cost and can be directly traced in relation to the final product. The Direct material cost is a variable cost owing to the reason that it varies directly with volume of the production. The more is the production volume, the more will be the direct material cost.

Direct Labor

It is the second most important production cost in relation to the final product. In case of service, it is even the most important cost because in case of service there is little use of the direct material. Direct Labor cost is a variable cost owing to the reason that it varies directly with volume of the production. The more is the production volume, the more will be the direct material cost. Prime cost is referred to as the sum of the cost incurred under the heads that is Direct Material and the Direct Labor.  

Variable Overheads

Variable Overheads is the terms that is used to refer to such cost that cannot be directly traced in relation to the final product, however, it is necessary in order to finalize the production of the specified product or service line. Variable overheads are also variable cost owing to the reason that it varies directly with volume of the production. The more is the production volume, the more will be the direct material cost. Prime cost is referred to as the sum of the cost incurred under the heads that is Direct Material and the Direct Labor.

Fixed Overheads

These costs are such costs that they do not vary directly in relation to production. Over and above, they are not directly required in relation to production. Instead these are costs that will facilitate the production process.

Allocation of the Costs

It is important and pertinent step that first of all costs need to accumulated in relation to the specified cost pools. Those cost pools do not change frequently and are represented by specific heads of accounts. Subsequent to cost accumulation in relation to the cost pools, the next step is the assessment of the activity that would be the basis of charging and levying of the costs. For instance, Material cost in addition to the labor hours are most applied activities for purpose of the cost allocation. The accumulated costs are divided by the estimated activity thresholds to compute and infer the per unit allocation charge of the cost. Consequently, per unit allocation charge times the actual activity is the final cost for the overheads that would be absorbed into actual produce along with the Direct Material and Direct Labor cost. Subsequent to the period end, the absorbed overheads are compared to the spending that is actually incurred and the resulting adjustment is made to the account that is cost of goods sold. This is the gist of Absorption costing which requires the overhead absorption by employing the predetermined overhead rate with regard to all the direct or indirect production cost that are incurred in relation to the production of the goods or services. 

Private Company Limited by Shares

In one-liner, Private Company limited by shares is referred for such a company that enjoys the privilege of limited liability. The members are actually the entities that together comprise a Private company hence they have limited liability and the extent of their liabilities is up to the maximum amount that is invested by them. The invested amount made up of two parts. Firstly, it is the nominal amount of shares followed by the amount paid in the form of premium in relation to the issue of shares. This is the maximum amount for which they can be held liable in the case of the legal proceedings or alternatively the litigation in relation to the liquidation. The private companies are subject to limited regulations and disclosure requirements in comparison to the Public company. The reason that the public company used to be the subject of the extensive regulation and disclosure requirements is because of the involvement of the public stake.

Small Companies, Naming Convention and Disclosure Requirements

Small companies are essentially Private companies. The rationale they are referred to as the small companies is their small scale of operations and conduct of business. In relation to naming convention, private companies names’ are followed by the suffixes that is ltd, inc which represents limited, incorporated words respectively and demonstrate the limited liability of the company in real-time. The companies Act in most of the common wealth countries is almost similar and comparable. In accordance with the provisions of the act in relation to the matters of the company, the private companies are required to have at least one director followed by a position of secretary as well. It is important to note that for the position of director or the secretary, the potential candidate should be an individual and have legal capacity and should not be adjudged a Bankrupt from the position of the court of law.

Share Certificates and Accounts of the Private Company

It is an essential requirement in relation to the incorporation of the private company; the company formally issues certificates of the shares of the same company to the subscriber and the potential subscribers against consideration of their agreeing to be members and forwarding the premiums to the company in this regard. The shares used to have added feature of transferable to some other subscriber or alternatively the authorized representative of the transferor subscriber.  The private companies are subjected to the requirement of making annual and periodic accounts. Over and above, the companies are required to have the audit of the same and then ensure the filings of the audited accounts in the appropriate forums such as securities exchange commission and the registrar. Over and above, private companies are required to have the registered office to make sure the communication of the regulatory authorities and other stakeholders with the company.

Conversion to the Public Company

A private company can be easily converted into the public company by making some essential changes to the articles of association in addition to complying with the requirements of the companies act regarding the passing of the special resolution.  

Accounting Equation

Accounting Equation Example

Accounting Equation Example

This post is all about Accounting Equation examples in the accounting. Accounting Equation are important in 

relation to the preparation of the accounting records as well as an important and concrete step pertaining to 

the assurance of the correctness of the accounting cycle.

Example 1 

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Journal Entries Example

Journal Entries Example

This post is all about Journal entries examples in the accounting. Journal entries are important in relation to the preparation of the accounting records as well as an important and concrete step pertaining to the accounting cycle.

Example 1 

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Example 2

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Leadership Development Journal

LDR 535  - University of Phoenix

University of Phoenix 

The University of Phoenix is an excellent and prestigious institute that offers a variety of programs in relation to Business, Finance and accounting with the focus on taxation, HR and marketing.

D's Devices Data Communications and Project Planning

Click here to view the guided solution in relation to the Data Communication and Project Planning Week assignment of the University of Phoenix Week 2 assignment of the course LDR 535 Leadership Development Journal.

Data Communications and Project Planning - University of Phoenix

BIS/320 Business Information Systems - University of Phoenix

University of Phoenix 

The University of Phoenix is an excellent and prestigious institute that offers a variety of programs in relation to Business, Finance and accounting with the focus on taxation, HR and marketing.

D's Devices Data Communications and Project Planning

Click here to view the guided solution in relation to the Data Communication and Project Planning Week 2 assignment of the University of Phoenix Week 2 assignment of the course BIS/320 Business Information Systems. The solution is provided by the experts who have experience with the renowned academic websites like chegg.com and coursehero.com.

Straight Line Depreciation Method

Straight Line Depreciation Method

This method is used to depreciate an Asset when the embedded and related economic benefit from the controlled or alternatively owned asset is reasonably expected of equal magnitude in every year of the related useful life that is reasonably estimated by the management of the organization. Consequentially, depreciation would be charged on an equal basis in all the years for which asset is under use. This method is mostly used when the pattern of how the economic benefit from the asset cannot be known.  

Cost of Asset

The Cost of the specific asset usually includes all the outright costs which are required to bring the very same asset to its intended location for the purpose of use. This will include costs like purchase price, transportation, installation etc.

Residual Value

Residual Value is a central concept. It is usually the amount that is reasonably expected to be received or alternatively realized in relation to the transaction of selling the asset after the asset is no longer used in connection with the business and is usually disposed of. This is the amount which is net depreciated as it is expected that this amount which will be received by its sale, not by the use of the asset.

Useful Life of Asset

It is the reasonable expectation in relation to the number of years for which or during which the subject asset will be used by business and is expected to generate positive economic benefits for the business.

Example

A business purchases an asset that is of non-current nature bearing the estimated useful life of almost 5 years on the date that is 1^st July 2011. The outright cost in relation to the Asset is $10,000 followed by the scrap value that is residual value reasonably expected and estimated to be around $500).

Requirement  and Solution

The computation of the annual depreciation charge pertaining to both of the years that is 2014 & 2015 and remaining value of the Asset. Depreciation expense for every year will be = Cost of Asset- Residual Value/ No of Years of Useful Life =$10,000-$500/5 =1900$ per year. Accumulated Depreciation up to year 2014= No of Years * Depreciation for the year =3*$1900 =5700. Remaining Value of Asset as at 30th July 2014=10,000-5700 =4300. Accumulated Depreciation up to year 2015= No of Years * Depreciation for the year =4*$1900 =7600. Remaining Value of Asset =10,000-7600 =2400.

Change in the Useful life of Asset or Change in the Residual Value of Asset:

If the initial estimate regarding the useful life of the asset or its residual value change it is necessary to revise the accounting estimate to reflect more accurately the economic benefits of the assets and how they are consumed. If such a change happens it is necessary to take the changes into consideration from the current year and into coming years. In the case of a change in useful life of Asset aforementioned formula should be adapted a little to reflect the change as shown in the following formula which needs to be employed in relation to the computation of the straight line depreciation charge pertaining to the current as well as subsequent years.

Quick Tip Depreciation that has been already charged in previous years is never reversed as according to IAS 8 Changes in Accounting Estimates and Accounting Policy change in Depreciation Rate, Useful life, and residual value are accounting estimates, which according to IAS-8 change in accounting estimates. Accounting Estimates if changed are prospective, not retrospective.

Example of Revision of Useful Life

An asset having non-current nature is effectively purchased on the date that is 1 January 2005. The purchased asset have the historical cost equal to $500,000. Residual Value that is estimated and assessed at the point of time of acquisition is $100,000. There is no Revision in relation to the estimate pertaining to the residual value on 1^st of  January 2009. Useful Life of the purchased asset estimated and assessed at the point of time of purchase is 10 years. There is a revision in relation to the estimate of the Useful Life and is estimated to be 15 years on the date that is 1st January 2009. You need to calculate annual depreciation charge in relation to both the years that is years 2008 and 2009.

Solution

Depreciation expense for year 2008: 500,000-100,000/10 =40,000

Depreciation Expense for the Year 2009 = 500,000-0-0/15 =33,333.

Trend Analysis

Trend Analysis

Trend analysis is a very effective technique that is employed by the investors in relation to the prediction of the future outcome in the market of the securities. The basis of such predictions is the past data in relation to your objective for which you are seeking trend analysis. There are three important and central aspects in relation to the trend analysis that are short-run, intermediate run and finally the long-run. These are actually the time periods for which trend analysis is developed. There are no particular requirements in relation to the time period regarding the direction that would be deemed as a trend, however, the longer the period will be the more reliable will be the direction of the trend and would effectively assist in the decision making of the investors or the stakeholders.

Trend Analysis and Time Series Data

Trend analysis is principally the application of the time series data. Time series data is such data that is specifically presented sequentially over the selected period of time. For instance, the collection of the data of sales in relation to each month is a primary example of the time series data. The employment of the trend analysis yields general pattern in relation to the relationship between the selected and subject variables of interest. Over and above, it yields and indicates the expected direction of the subject variables in relation to the future periods and thus effectively assists in the precise and persuasive prediction of the market behavior.  

Trend Analysis Application

The results of the trend analysis are used to manifest the behavior of the market that is whether it bullish market or bearish market and following that particular trend information until there is an indication of the trend reversal, for instance, the bull-to-bear market in real-time. The pertinent advantage of the trend analysis is that it leads to the opportunity of profits provided one has followed the information yielded from the trend analysis.

How to use Trend Analysis?

In order to make effective use of the trend analysis and subjecting the applicable data to the analysis, it is quite important that you narrow down the particular market segment that is select the target and particular industry. Subsequent to it precisely select the specific nature of the investment for which trend analysis is sought. This will lead to the observation of the specific performance of the targeted investment type and the precise observation in relation to such factors that have significant influence pertaining to your selected investment type and its consequent behavior. This data will significantly assist the users in the prediction of the market direction that is if it is bearish, bullish, moving forward or otherwise moving backward.

Trend Following

Trend following is that kind of the securities trading system that is fundamentally based on the technique of the trend analysis and its related recommendations in relation to the decision making pertaining to the investment. The particular tools that are used in relation to the making of the trend analysis are computer analysis followed by relevant data modeling.