152 FARM ACCOUNTING 



A method similar to the straight line, which is very 

 practical and sufficiently accurate for farm purposes, is an 

 iinse.ientiiic modification of the 'Miminisiiin;: value" 

 method. As practiced on the farm, it consists in calculat- 

 ing a certain percentage of the book value at the clo- 

 each year. The percentage is based on the number of years 

 of life of the machine or building, e-g., 1 n '/' for a machine 

 or building expected to last 10 or 15 years. This method 

 never reduces the book value to BCPO. That is one element 

 in its favor as far as use on the farm is concerned. 



Recording Depreciation in Accounts. Under the "di- 

 minishing value" method as practiced on the farm, if 

 Ivjiiipment account has a balance of $1000 at the begin- 

 ning of the year and 10% is considered as a reasonable 

 rate of depreciation, the entry at the close of the year is 

 a debit to Equipment K\ id a credit to Equipment 



of $100. This would leave a balance of $900 in the Kquip- 

 ment account at the beginning of the second year. At the 

 end of the second year, the entry would be for $90 (10% 

 '00, the book value at the beginning of the year). At 

 tbe end of tVe third year, it would be $81 (10% of $sli> 

 If at the beginning of the third year, $50 worth of new 

 machinery is purchased, the depreciation calculated at tin- 

 close of the year is 10% of $860. 



The effect of the entries for depreciation ac stated above 

 is to decrease the profits of each year and decrease tin 1 

 value of the resource depreciated. The profits are <1- 

 creased because the annual charge to Kmiipment K\j, 

 account represents the wear and tear on the equipment for 

 the year. 



Diminishing Value and Straight Line Depreciation. 

 The rate of 10% as used in the examples above is a con 

 servative and practical rate to use in calculating deprecia- 

 tion on farm equipment, under the diminishing value 

 method. A given rate used under this method results in 



