5. Methods of charging depreciation from fixed funds

Charging depreciation can be carried out only by those ways which are allowed to be used. Among the methods of charging depreciation there are the following ones:

- the linear method;

- the method of diminishing residue;

- the method of writing off the cost according to the sum of numbers of years of the term of paying usage.

The application of one of the ways for the group of homogeneous objects of fixed funds is carried out during the whole term of its paying usage.

The linear method belongs to the most widespread ones. It is used approximately by 70 % of all enterprises. The popularity of the linear method is caused by the simplicity of its application. Its essence consists in the fact that the equal part of the cost of the given kind of fixed funds is depreciated every year.

The annual sum of depreciation charges is calculated as follows:

D = (C_ac * N_d) / 100 ,

where D - the annual sum of depreciation charges; C_ac - acquisition cost; N_d - norm of depreciation charges.

For example, the enterprise has bought a computer. Its cost is 10000 hrivnas, the term of service life is 5 years. Thus, annually we will write off for the depreciation 10000/5 = 2000 hrn:

Year	Residual value at the beginning of the year (hrivnas)	The sum of annual depreciation (hrivnas)	Residual value at the end of year (hrivnas)
1	10 000	2 000	8 000
2	8 000	2 000	6 000
3	6 000	2 000	4 000
4	4 000	2 000	2 000
5	2 000	2 000	0

It is necessary to note the following. If the residual value of an object is equal to zero it does not mean that the price of the computer became equal to zero. This computer can have real value, to be in working condition and to serve much longer than one year. Zero residual value of the given computer means only that the enterprise completely compensated expenses for its purchase.

The linear method is expedient to use for those kinds of fixed funds where the time, but not the obsolescence is the major factor which limits the term of service life.

When using the method of diminishing residue the annual sum of depreciation charges is defined proceeding from the residual value of an object of fixed funds at the beginning of the year under review and the norm of depreciation estimated on the basis of term of paying usage of this object:

D = V_res. * [(k * N_d) /100] ,

where V_res.- residual value (depreciated cost) of an object; k - coefficient of acceleration; N_d - norm of amortization for the given object.

When using the method of writing off the cost according to the sum of numbers of years of the term of paying usage the annual sum of depreciation is defined proceeding from the acquisition cost of an object of fixed funds and the annual ratio, where in the numerator there is the number of years remaining till the end of the term of service life of an object, and in the denominator there is the sum of numbers of years of service life of an object:

D = C_ac * [T_rem. / [T (T + 1) / 2]] ,

where C_ac - acquisition cost; T_rem. – the number of years which remain till the end of the term of paying usage; Т - term of paying usage.

For example, the equipment at the cost of 100000 hrivnas was commissioned. The term of paying usage is 5 years. The sum of numbers of the usage term is 15 (1+2+3+4+5). The calculation is presented in the table:

Year	Residual value at the beginning of the year (hrivnas)	Norm of depreciation, %	The sum of annual depreciation (hrivnas)	Residual value at the end of year (hrivnas)
1	100000	100000 x 5/15 =33333	33333	66667
2	66667	100000 x 4/15 =26667	26667	40000
3	40000	100000 x 3/15 =20000	20000	20000
4	20000	100000 x 2/15 =13333	13333	6667
5	6667	100000 x 1/15 =6667	6667	0

This method is equivalent to the method of diminishing residue, but it enables to write off the whole cost of an object without the residue.

During the year under review depreciation charges from objects of fixed funds are charged monthly irrespective of the used method of charging at the rate of 1/12 of the annual sum.