Straight Line Method of Depreciation:

• In a straight line depreciation method, it is assumed that the asset

uniformly depreciates over its useful life. The cost of the asset is evenly
spread over its useful and functional life. Thus, the depreciation expense
on the income statement remains the same for a particular asset over the
period. As such the income statement is expensed evenly, so is the value of
the asset on the balance sheet.The carrying amount of the asset on the
balance sheet reduces by the same amount.
Declining Method of Depreciation:

Under this system, a fixed percentage of the diminishing value of the asset is
written off each year so as to reduce the asset to its residual value at the end of its
life. This method is commonly used for plant, fixtures, etc. Under this method, the
annual charge for depreciation decreases from year to year, so that the earlier
years suffer to the benefit of the later years.
In this method, depreciation is calculated based on the rate of depreciation
over the value of the asset until the value reaches salvage value or less. It is
also known as the Reduced balance method (or) Declining balance method.
SINKING FUND METHOD OF DEPRECIATION:

In the sinking fund method, the depreciated money is set aside in a

fund and then the money is again invested in government securities.
These money then earn interest as they do with any other government
securities. The interest earned is again taken to the sinking fund account.
Finally, at the end of the life of the asset, the government securities are
sold off and the money received from the sale proceeds are used
in replacing the asset.
WHEN IS SINKING FUND METHOD OF DEPRECIATION IS
USED?
• Sinking fund method of depreciation is mostly used by companies
having high cost machinery and assets. Large scale industries.
• At the end of useful life of the asset, often the companies would require
funds to replace the asset. The cost involved in replacement depends on
the nature of the asset. If the asset is huge and cost is too high, the
companies should make some arrangements to keep a reserve at the
end of useful life of the asset to replace it.
• If the assets are not replaced well within time, production gets affected
resulting in business loss.
• JOURNAL ENTRIES FOR SINKING FUND METHOD

• a) At the end of first year

• Setting aside the amount of depreciation
• Depreciation A/c Dr.
• To Sinking Fund A/c
• Charging depreciation to profit and loss account
• Profit and Loss A/c Dr.
• To Depreciation A/c
• When the amount equivalent to depreciation is invested
• Sinking Fund Investment A/c Dr.
• To Bank A/c
Annuity Method of Depreciation:

Under annuity method of depreciation the cost of asset is regarded as investment

and interest at fixed rate is calculated thereon. Had the proprietor invested outside
the business, an amount equal to the cost of asset, he would have earned some
interest. So as a result of buying the asset the proprietor loses not only cost of asset
by using it, but also the above mentioned interest. Hence depreciation is calculated in
such a way as will cover both the above mentioned losses. The amount of annual
depreciation is determined from annuity table.

Annuity method is particularly applicable to those assets whose cost is heavy and life
is long and fixed, e.g. leasehold property, land and building etc.
Example:
• We purchased an asset on lease on 01/04/2016 for five years at a cost of
Rs. 50,00,000/-. It is proposed to depreciate the lease by annuity method
by charging loss of normal rate of interest @5%. With the help of annuity
table, we get know the amount of depreciation to be charge by following:
• Re. 1 must write off a sum of Re. 0.230975 every year.
 Opening balance Interest Amount of Closing balance of an
Year ended
of an asset Debited depreciation asset

31-03-2017 50,00,000 2,50,000 11,54,875 40,95,125

31-03-2018 40,95,125 2,04,760 11,54,875 31,45,010

31-03-2019 31,45,010 1,57,250 11,54,875 21,47,385

31-03-2020 21,47,385 1,07,370 11,54,875 10,99,880

31-03-2021 10,99,880 54,995 11,54,875 0

* Closing Balance = Opening Balance of an Asset + Interest Debited – Amount of Depreciation.
SUM OF DIGITS METHOD OF DEPRECIATION:

• It is the variation of the “Reduced Balanced Method”. In this case, the annual depreciation
is calculated by multiplying the original cost of the asset less its estimated scrap value by
the fraction represented by:
(The number of years (including the present year)of remaining life of the asset) / (Total of
all digits of the life of the asset (in year))
• Example: The cost of an asset is $100,000 with salvage value $10,000 and life of 3years.
Calculate depreciation for 1st, 2nd, 3rd year under sum of digits method?
Sol: Given, Cost of an asset = $100,000
Salvage value = $10,000
Depreciation = 100,000 - 10,000 = 90,000
Sum of digits = 1+2+3 =6
1 st year depreciation = (3/6)*(90,000) = 45,000 2 nd year depreciation = (2/6)*(90,000) =
30,000 3 rd year depreciation = (1/6)*(90,000) = 15,000
MODULE 3

• National Income
• National Income Accounting
• Methods of Estimation
• Various Concepts of National Income
• Significance of NI
• Limitations of NI
NATIONAL INCOME

• National income means the value of goods and services produced by a

country during a financial year. Thus, it is the net result of all economic
activities of any country during a period of one year and is valued in terms
of money.
WHY NATIONAL INCOME IS IMPORTANT

• Gives an indication of the material well-being of the people of a country

• Help policy-makers in formulating good economic policies both in government and in
private industry
• To know the economic growth and where the country is in the business
• National income statistics are the most important tools for long-term and short-term
economic planning.
• It enables us to know the relative importance of the various sectors of the economy and
their contribution towards national income.
• Modern governments try to prepare their budgets within the framework of national
income data and try to formulate anti-cyclical policies according to the facts revealed by
the national income estimates.
• National income studies show how national expenditure is divided between consumption
expenditure and investment expenditure
• National income figures enable us to know the relative roles of public and private sectors
in the economy
NATIONAL INCOME ACCOUNTING

• National income accounting is a bookkeeping system that a government

uses to measure the level of the country's economic activity in a given
time period.Accounting records of this nature include data regarding total
revenues earned by domestic corporations, wages paid to foreign and
domestic workers, and the amount spent on sales and income taxes
by corporations and individuals residing in the country.
METHODS TO MEASURE NATIONAL INCOME

• Final Product Method

In this method, national income is measured as a flow of goods and services. We calculate money
value of all final goods and services produced in an economy during a year. Final goods here
refer to those goods which are directly consumed and not used in further production process.
• Income Method
Under this method, national income is measured as a flow of factor incomes. There are generally
four factors of production labour, capital, land and entrepreneurship. Labour gets wages and
salaries, capital gets interest, land gets rent and entrepreneurship gets profit as their
remuneration.
• Expenditure Method
In this method, national income is measured as a flow of expenditure. GDP
is sum-total of private consumption expenditure. Government consumption
expenditure, gross capital formation (Government and private) and net
exports (Export-Import).
CONCEPTS OF NATIONAL INCOME
• Gross National Product (GNP):
GNP is the total measure of the flow of goods and services at market value resulting from
current production during a year in a country, including net income from abroad.
• Gross Domestic Product (GDP):
GDP is the total value of goods and services produced within the country during a year.
This is calculated at market prices and is known as GDP at market prices. Dernberg defines
GDP at market price as “the market value of the output of final goods and services
produced in the domestic territory of a country during an accounting year.”
• Net Domestic Product (NDP):
NDP is the value of net output of the economy during the year. Some of the country’s
capital equipment wears out or becomes obsolete each year during the production process.
The value of this capital consumption is some percentage of gross investment which is
deducted from GDP. Thus Net Domestic Product = GDP at Factor Cost – Depreciation.
• Net National Product (NNP):
NNP includes the value of total output of consumption goods and investment goods. But
the process of production uses up a certain amount of fixed capital.
All this process is termed depreciation or capital consumption allowance. In order to arrive
at NNP, we deduct depreciation from GNP. The word ‘net’ refers to the exclusion of that
part of total output which represents depreciation. So NNP = GNP—Depreciation.
• Per Capita Income:
The average income of the people of a country in a particular year is called Per Capita
Income for that year. This concept also refers to the measurement of income at current
prices and at constant prices.
LIMITATIONS OF NATIONAL INCOME
• First, national in curve figures are not accurate. This is inevitable because
measuring the economic activity of an entire country can never be done
precisely.
• The ‘black economy’ distorts the figures.
• A rise in national income may not mean a rise in living standards.
• The accounts only measure paid activities. They, therefore, exclude do-it-
yourself activities and the work of housewives.
• National income often rises in time of war, or the threat of war, because
money is spent on weapons. This will push up GNP, but the people may be
acutely short of goods to buy.
• When making comparisons with the past, adjustments have to be made to
allow for inflation. Hence it is important when looking at the figures to
see whether they are in nominal terms, i.e., the actual figures not adjusted
to remove the effects of inflation.
• Another adjustment that has to be made when making comparisons with
the past is that the figures have to be adjusted to allow for population
changes. If national income has risen by 10%, but population has also risen
by 10%, the average person is no better- off.
• Many factors affect the quality of life but are excluded from GNP.
• On the other hand, economic growth may be accompanied by
increased pollution, overcrowded cities and a frenetic lifestyle—
factors ignored by statisticians. The national income accounts
measure some of the quantitative factors affecting life, but they
ignore many features of the quality of life.
Module 4:

• Inflation Definition
• Theories of Inflation
• Methods to control Inflation
INFLATION
• Inflation is a quantitative measure of the rate at which
the average price level of a basket of selected goods and
services in an economy increases over a period of time. ...
Often expressed as a percentage, inflation indicates a
decrease in the purchasing power of a nation's currency.
Definition

• Inflation is a sustained increase in the general price level of

goods and services in an economy over a period of time. When
the general price level rises, each unit of currency buys fewer
goods and services; consequently, inflation reflects a reduction
in the purchasing power per unit of money.
• Inflation is basically a rise in prices.
• A more exact definition of inflation is a situation of a sustained
increase in the general price level in an economy. Inflation
means an increase in the cost of living as the price of goods and
services rise.
• If the price rate in the current year is ‘P1’ and in the previous year is
‘P0’ then the inflation for the current year is (P1-P0)/P0 x 100

Theories of Inflation
• The Demand-Pull Inflation:
• The theory of demand-pull inflation relates to what may be called
the traditional theory of inflation.
• The essence of this theory is that inflation is caused by an excess of
demand (spending) relative to the available supply of goods and
services at existing prices.
Cost-Push Inflation:
• The theory of cost-push inflation became popular during and after the
Second World War. This theory maintains that prices instead of being
pulled-up by excess demand are also pushed-up as a result of a rise in the
cost of production. Under cost-push inflation prices rise on account of a
rise in the cost of raw materials, especially wages. The theory holds that
the basic explanation for inflation is the fact that some producers, group
of workers or both, succeed in raising the prices for either their product
or services above the levels that would prevail under more competitive
conditions.
Mixed Demand Inflation:
• The problem of identifying the basic nature-and fundamental source of
inflation continues. Does inflation arise from the demand side of the
goods, factor and asset markets or from the supply side or from some
combination of the two—the so-called mixed inflation. Many economists
have come to believe that the actual process of inflation is neither due to
demand-pull alone, nor due to cost-push alone, but due to a combination
of both the elements of demand-pull and cost-push—called mixed
inflation.
MEASURES TO CONTROL INFLATION

• Monetary measures:
1. Credit Control
2. Demonetisation
• Fiscal Measures:
1. Reduction in unnecessary expenditure
2. Increase in taxes
3. Increase in savings
4. Surplus Budgets
5. Public debt
OTHER MEASURES

• Rationing
• Increase in Production
• Price Control
• Rational wage policy