Uniform Charge Method

While maintaining accounts, one has to make sure of the correct values of any increment/decrement. When depreciation happens, that is, the value of fixed assets drops down, it is important to record this decrement carefully. There are various methods by which this can be accounted for, and one of the approaches is 'uniform charge method.' In this method, the value of depreciation is charged in a uniform manner year after year in the form of a fixed instalment method and many more. However, this method is best applicable to productive assets. There are some sub-methods that fall under this. Listed below are their names and a small explanation for each one of them.

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Depreciation Formula

Amount of Depreciation = \[\frac{\text{Cost of an asset – Net residual value}}{\text{useful life}}\]

Various Methods included in Uniform Charge Method

There are four sub-methods that come under this major method.

Fixed Instalment Method

In the fixed instalment method, a particular cost of depreciation is noted down with respect to the utility of the asset's life. When the utility of the asset’s life ends, this depreciation value either lowers down to zero or is changed to its residual value.

Annuity Method

In this method, the depreciation value is derived from the cost of the asset and the interest loss in the capital’s expenditure. This method prevails on the assumption that there might have been a better outcome if the investment was made in some other place. That is why we calculate interest loss, too, to keep a clean record of depreciation value. 

Depreciation Fund Method 

This method is used when the cost of depreciation is too high, and the new asset can not be bought with the remaining sources. Even though the depreciation cost is noted every year with proper terms and conditions, sometimes the company may lack resources to further buy the next asset. During such times, this method comes in use.

Insurance Policy Method 

In this method, the company does not purchase securities; instead, it buys an insurance policy. This insurance policy is equal to the cost of the asset, which needs to be replaced. Every year, in the beginning, the company will have to pay some money, known as premium. In exchange for the premium, the insurance company agrees to pay a specific sum of money to them.

These are the various sub-methods that come under the Uniform Charge Method. All of these have their own advantages and disadvantages. While applying any of these, the company should look upon its resources and capability, and make the correct approach.

The relevance of Uniform Charge Method

In the sector of accounting, this method is very brief, and it is easy to keep a record of this. For a company, the correct cost of depreciation to be noted down is very important, as it adversely affects the economic growth of the company. Any error in this often results because of the use of poor methods. Thus, the Uniform Charge Method is a neat process, which, if applied, yields out correct results, thus being of great help to the company.

Did You Know?

This method is also known as Straight Line Method or Fixed Percentage on the Original Cost Method because this method changes the depreciation cost every year uniformly, thus avoiding any hindrance and abnormalities in the outcome. The original cost plays a vital role while using this method; its other names go along completely with the process.