Which method of depreciation is followed to have a uniform charge for depreciation and repairs and maintenance together?

Question

Accepted Answer

The correct option is 1:
The **Reducing Balancing Method** (also known as the Written Down Value or Diminishing Balance Method) is correctly followed to ensure a relatively uniform total charge of depreciation and repairs over the useful life of an asset. Under this method, the amount of depreciation charged is highest in the initial years and progressively decreases as the asset ages. This pattern is deliberately chosen because it counterbalances the trend of repair and maintenance costs, which are typically *low* when the asset is new but steadily *increase* over its life. By combining the decreasing depreciation charge with the increasing repairs and maintenance charge, the total annual burden on the Profit and Loss Account for using the asset remains relatively stable or uniform, thereby adhering to the principle of charging the revenue of each accounting period with a fair share of the cost of the fixed asset.

The incorrect option is 2:
The **Fixed Instalment Method** (Straight Line Method) is incorrect because it charges an equal amount of depreciation every year. While this leads to a uniform depreciation expense, the total charge will not be uniform. Since repairs and maintenance costs consistently increase over the asset's life, adding a constant depreciation amount will cause the *total* expense (depreciation plus repairs) to continuously *rise* year after year. This violates the goal of a uniform total charge.

The incorrect option is 3:
The **Depletion Method** is incorrect as it is designed specifically for wasting assets like mines, quarries, or oil wells. Under this method, the depreciation (or depletion) charge is based on the units of output extracted or consumed, not on the passage of time or the asset's age in a manner that balances out repair costs. This method aims to match the cost of the asset with the revenue derived from its output, not to achieve a uniform total annual expense.

The incorrect option is 4:
The **Annuity Method** is incorrect because its primary purpose is to account for the interest lost on the capital invested in the asset. The annual depreciation charge in the Annuity Method is calculated so that the total of Depreciation + Interest on the written-down value remains constant. Since this method already factors in interest, and the actual repair cost is a separate variable that increases over time, the total of (Depreciation + Repairs) would not be uniform. Furthermore, its inherent complexity is not geared toward balancing repair costs but rather for economic evaluation of the asset's use.