meaning and methods calculation of Depreciation

WHAT IS DEPRECIATION?

Depreciation is the reduction in the value of assets due to wear and tear.

Every asset is subject to wear and tear in the ordinary course of its use and also with the passage of time. The cost of the asset is allocated over time and considered as expense.

It is applied on long term assets which give benefits for many years. For example on plant & machinery, vehicles, computers, furniture, building etc. Land is not subject to wear and tear and thus depreciation is not levied on land but applicable on a building.

onsidering depreciation as an expense is very much required for successful financial management. For example, a driver gives his car for tourism purpose, he has to consider the fact that car has a limited useful life and he needs to replace that after some years. For that, while calculating its operation cost, he has to consider the cost of car, its life, the resale value after useful life and add it to other expenses for calculating total cost.

COMMON METHODS OR TYPES OF DEPRECIATION

Written Down Value (WDV) Method

WDV method  is the most common used method of depreciation. Also in income tax act, depreciation is allowed as per WDV method only.

In this method depreciation is charged on the book value of asset and book value is decreased each year by the depreciation.For eg- Asset is purchased at rs. 1,00,000 and depreciation rate is 10% then first year depreciation is rs. 10,000(10% of rs. 1,00,000), second year depreciation is rs. 9,000 ( 10% of 90,000 [1,00,000 – 10,000]) and third year depreciation is rs. 8,100 ( 10% of rs. 81,000 [90,000 – 9,000]).

This method is also called reducing balance method. In the WDV method, the amount of depreciation goes on decreasing with time. An asset gives more value to a business in initial years then later year, therefore, this method is considered as the most logical method of depreciation.

 Straight Line Method (SLM)

In this method, equal amount of depreciation is charged on the asset over its useful life. For Example – asset is purchased for rs. 1,00,000 and useful life is 10 years with salvage value of Rs. 10,000 then depreciation is charged at Rs. 9,000 for each of the 10 years. (1,00,000 – 10,000)/10.

Formula for calculating depreciation rate (SLM) = (100 – % of resale value of purchase price)/Useful life in years
Depreciation = Purchase Price * Depreciation Rate or (Purchase price – Salvage Value)/Useful Life

There are also other methods of depreciation but they are not often used such as depreciation on the basis of units of production.

In companies act the depreciation rate is also based on the number of shifts. Logically an asset is expected to have a shorter life if it used extensively.Example –

Cost of asset = 2,00,000
Salvage value = 30,000
Useful Life = 10 Years

And thus Depreciation rate as per SLM = (100-15)/10 = 8.5%
Depreciation rate as per WDV = 17.28

year	Depreciation as per SLM	Depreciation as per WDV
1	17,000	34,560.53
2	17,000	28,588.38
3	17,000	23,648.23
4	17,000	19,561.75
5	17,000	16,181.43
6	17,000	13,385.24
7	17,000	11,072.23
8	17,000	9,158.92
9	17,000	7,576.24
10	17,000	6,267.04
Total Depreciation	1,70,000	1,70,000

working capital raising the finance. Diff between Fix & Working capital

Working capital finance

Working capital finance is business finance designed to boost the working capital available to a business. It's often used for specific growth projects, such as taking on a bigger contract or investing in a new market.

Different businesses use working capital finance for a variety of purposes, but the general idea is that using working capital finance frees up cash for growing the business which will be recouped in the short- to medium-term.

There are many different types of lending that could be considered working capital finance. Some are explicitly designed to help working capital (whatever industry you’re in), while others are useful for specific sectors or requirements.

Here are some of the more common types of working capital finance.

Definition

Working capital is the amount of cash a business can safely spend. It’s commonly defined as current assets minus current liabilities. Usually working capital is calculated based on cash, assets that can quickly be converted to cash (such as invoices from debtors), and expenses that will be due within a year.

For example, if a business has 5,000 in the bank, a customer that owes them 4,000, an invoice from a supplier payable for 2,000, and a VAT bill worth 4,000, its working capital would be 3,000 (5,000 + 4,000) - (2,000 + 4,000).

Liquid cash

Working capital is seen as ‘working’ because the business can use it — in other words, it’s not tied up in anything long-term. Whether you want to buy stock, invest in the business, or take on a big contract, all of these activities require working capital — cash that’s quickly accessible.

On the other hand, if your business is profitable but has big bills to pay soon, your working capital situation could be worse than it might seem — or could even be negative.

Working capital loans

Working capital loans are normally over a short or medium term, designed to boost cash in the business to go after new opportunities. The size of the working capital loan you can get depends on many facets of your business profile.

Secured working capital loans will require assets to use as security, so the amount you can borrow is restricted by the assets available.

Meanwhile, it’s possible to get unsecured business loans up to £250,000 to help with working capital — but for these loans your credit rating will be more important, and you’ll often have to give a personal guarantee.

Overdrafts

Overdrafts have traditionally been a useful source of working capital finance for many businesses across all sectors, but they're hard to get with a business bank these days. On the alternative finance market there are lots of flexible business overdrafts, which are a great way to finance working capital at short notice when you need it.

The downside of using overdrafts for working capital is that they often have low credit limits, which might limit your plans. They’re effectively a form of unsecured lending, so even if you’re lucky enough to get one, the limit is likely to be fairly low unless your business has a strong history.

Revolving credit facilities

Similar to overdrafts, revolving credit facilities give you a pre-approved source of funding that you can use when you need. But the key difference is that with a revolving credit facility you don't need a specific bank account with that provider — you can direct the money wherever you need it.

The best part is that with many providers, once they're set up you only pay interest on outstanding funds, which means they can sit idle for a few weeks but are ready to go at a moment's notice. That makes revolving credit facilities a useful safety net to have in place.

Invoice finance

For businesses that offer credit terms to their customers, invoice finance is a common type of working capital finance. Along with other types of receivables finance, invoice finance is based on money owed to your business, and you normally get a percentage of the value owed via one invoice or the entire debtor book.

Factoring includes credit control, and is often favoured by smaller companies with lower value invoices, whereas discounting and selective invoice finance are other potential options for larger companies with creditworthy customers.

Although invoice finance is a good way of unlocking working capital in the short-term, the amount you borrow is (by definition) limited by the value already owed to you via customer invoices — so it’s not necessarily the right option if you need a more significant amount of money for longer-term growth plans.

Trade finance and supply chain finance

Trade finance and supply chain finance work in a similar way to invoice finance. They’re both types of working capital financing designed for businesses that focus on physical stock rather than services rendered.

Supply chain finance is a mutually beneficial arrangement based on the creditworthiness of buyers, where the buyer can delay payment for longer while the supplier gets payment from the lender immediately (the payment delay is shouldered by the lender, rather than the supplier).

Trade finance is a more complex finance partnership that facilitates international trade, and often involves arrangements like prepayment for the shipment of goods from overseas manufacturers.

Asset refinancing

If you can’t get enough funding via an unsecured business loan, you can often use assets in your business to raise finance via an asset refinance.

Asset refinancing is based on valuable assets in the business, so you won’t usually be required to offer a personal guarantee or involve your personal home. Like invoice finance, the amount you can borrow depends on the value of the items used to secure funding against.

Merchant cash advances

If your business accepts payment from customers using card terminals, a merchant cash advance is another useful way to increase working capital. The product gets its name simply because it’s a cash advance for merchants — meaning businesses like retailers, pubs, cafés and restaurants are all suitable.

The amount you get advanced is normally expressed as a percentage of your average monthly card revenue (e.g. 120% of an average month), and critically, repayments are taken as a percentage of future card revenue too. That means repayments can feel relatively painless because they’re taken at the source.

Conclusion

There are many types of working capital financing available, and choosing the right product depends on your sector and circumstances, as well as what you're trying to achieve. To find out more about working capital financing, browse the related articles below or get in touch.

Fixed capital is the capital which is invested for long terms that means it remains in business for long time period i.e.  For several years

Working capital is the capital which is invested for short term that means it remains in business for short time period i.e. mostly for a year.

Liquidity:

Fixed capital assets have low liquidity since they are costly and require extensive asset disposal methods.

Working capital assets usually have more liquidity since they can promptly be changed over into cash.

Frequent requirement:

Fixed capital is not needed frequently in business. Its requirement is there when a company needs to do any large investment like spreading out of business or acquiring of more fixed assets.

Working capital is needed frequently in business to complete its daily transactions like buying of raw materials, paying wages and so forth.

Source:

The primary source of fixed capital includes debentures, shares and long term loans.

The primary and fundamental source of working capital includes fixed deposits, profits held by company, short term loans, debentures and shares.

Quantity:

The fixed capital is needed more in quantity as compare to working capital.

The working capital is needed less in quantity as compare to fixed capital.

"Four differences between Fixed capital and Working capital is given below.

Fixed capital:

It refers to the capital invested in the long term assets of the company. Money is never invested in this type of capital.

To establish a company or business, fixed capital is vital.

The finance for this type of capital is obtained from long-term debt.

Fixed capital serves strategic objectives.

Working capital:        

It refers to the "capital invested" in the current assets of the company. Money is the major investment of this "type of capital".        

To run and maintain a company or business, "working capital" is vital.        

The finance for this type of capital is obtained from short-term debt.        

Working capital serves operational objectives."

Functions of Human Resource Management
Planning
Organizing
Controlling
Question on Functions of Human Resource Management

·         Planning

·         Organizing

·         Directing

·         Controlling

A manager must plan ahead in order to get things done by his subordinates. It is also important to plan in order to give the organization its goals.

Also, planning helps establish the best procedures to reach the goals. Further, some effective managers devote a substantial part of their time to planning.

With respect to the human resource department, planning involves determining the personnel programs that can contribute to achieving the organization’s goals.

These programs include anticipating the hiring needs of the organization, planning job requirements, descriptions, and determining the sources of recruitment.

After the human resource manager establishes the objectives and develops plans and programs to achieve them, he needs to design and develop the organization’s structure to carry out the different operations. Developing the organization’s structure includes:

·         Grouping of personnel activity into functions or positions

·         Assigning different groups of activities to different individuals

·         Delegating authority according to the tasks assigned and responsibilities involved

·         Coordinating activities of different employees

Directing

The HR Manager can create plans, but implementing the plans smoothly depends on how motivated the people are. The directing functions of HRM involve encouraging people to work willingly and efficiently to achieve the goals of the organization. In simpler words, the directing functions of HRM entail guiding and motivating people to accomplish the personnel programs.

The HRM can motivate the employees through career planning and salary administration by boosting the employee’s morale, developing relationships, providing safety requirements, and looking after the welfare of employees.

In order to do this effectively, the HRM must identify the needs of the employees and the means and methods to satisfy them. Motivation is a continuous process as employees have new needs and expectations when the old ones are satisfied.

Controlling is all about regulating activities in accordance with the plans formulated based on the objectives of the organization. This is the fourth function of the HRM and completes the cycle. In this, the manager observes and subsequently compares the results with the set standards.

Further, he corrects any deviations that might occur. Controlling is one of the important functions of HRM as it helps him evaluate and control the performance of the department with respect to different operative functions. It also involves appraisals, audit, statistics, etc.

Q1. What are the four basic functions of HRM?

Answer:

The four basic functions of the HRM are similar to those of any manager – planning, organizing, directing, and controlling.

taylor scientific management

Taylor scientific management

Frederic Winslow Taylor started his career as a mechanist in 1875. He studied engineering in an evening college and rose to the position of chief engineer in his organization. He invented high-speed steel cutting tools and spent most of his life as a consulting engineer.

Frederick Winslow Taylor (1856-1915) is is called the father of Scientific Management. His experience from the bottom-most level in the organization gave him an opportunity to know at first the problems of the workers. Taylor’s principal concern was that of increasing efficiency in production, not only to lower costs and raise profits but also to make possible increased pay for workers through their higher productivity.

Taylor saw productivity as the answer to both higher wages and higher profits. He believed that the application of the scientific method, instead of customs and rule of thumb could yield this productivity without the expenditure of more human energy or effort.

Taylor published a book entitled, The Principles of Scientific Management, in 1911. But his ideas about scientific management are best expressed in his testimony that was placed before a committee of the House of Representatives in 1912. Industrial problems increased due to the advent of large scale factory systems, mass production and mechanization.

People needed some specific principles an methods for solving the problems they faced. The initial impetus in scientific management movement was Taylor. He was more concerned with the engineering aspect and the problems of workers and productivity oriented wages.

F. W. Taylor’s 4 Principles of Scientific Management

The fundamental principles that Taylor saw underlying the scientific approach to management may be summarized as follows:

. Replace rule-of-thumb work methods with methods based on a scientific study of the tasks.

2. Scientifically select, train, and develop each worker rather than passively leaving them to train themselves.

3. Cooperate with the workers to ensure that the scientifically developed methods are being followed.

4. Divide work nearly equally between managers and workers, so that the managers apply scientific management principles to planning the work and the workers actually perform the tasks.

Taylor concentrated more on productivity and productivity based wages. He stressed on time and motion study and other techniques for measuring work. Apart from this, in Taylor’s work, there also runs a strongly humanistic theme. He had an idealist’s notion that the interests of workers, managers and owners should be harmonized.

human resources Henry Fayol principles of mangement 14 principles

Principles of Management by Henri Fayol

Henri Fayol is claimed to be the real father of modern management. He was a Frenchman born in 1841 and was working as an engineer with a mining company. He improved the condition of the company from virtual bankruptcy to high success. From his practical experience, he developed some techniques. He brought out some 14 basic management principles, which he felt, could be used in all management situations, irrespective of the organizational framework.

He wrote a book entitled, General and lndustrial Management, in French that was later on translated into English. It is now considered as one of the classics of management literature. The book mainly covers the aspects of the immutable and repetitive character of the management process and the concept that management can be taught in the classroom or the workplace. He also laid down the principles of management, which he deemed important for any organization.

Division of Work: This is the principle of specialization, which is very well expressed by economists as being a necessary factor for efficiency in the utilization of labor.

Authority and Responsibility: In this principle, Fayol conceives authority as a combination of official authority deriving from a manager’s official position and personal authority, which is compounded of intelligence, experience, moral worth, past services etc.

Discipline: Holding the notion that discipline is ‘respect for agreements which are directed as achieving obedience, application, energy and the outward marks of respect’, Fayol declares that discipline requires good superiors at all levels, clear and fair agreements and judicious application of penalties.

Unit of Command: This is the principle, which states that on employee should receive orders from one superior only.

Unity of Direction: According to Fayol, the unity of direction principle implies that each group of activities having the some objectives must have one head and one plan. As distinguished from the principle of unity of command, Fayol perceives unity of direction as related to the functioning of personnel.

Subordination of Individual Interest to General Interest: In any group, the interest of the group should supersede that of the individual. When the interests differ, it is the function of the management to reconcile them.

Remuneration of Personnel: Fayol perceives that remuneration and methods of payment should be fair and also should be able to afford the maximum satisfaction to employee and employer

Order: Breaking this principle into material order and social order, Fayol thinks of it as a simple edge for everything. This organization is the principle, which refers to arrangement of things and persons in an organization.

Equity: Fayol perceives this principle as one of eliciting loyalty and devotion from personnel with a combination of kindliness and justice in managers while dealing with subordinates.

Stability of Tenure of Personnel: Finding that instability is both the cause and effect of bad management, Fayol points out the dangers and costs of unnecessary turnover.

Initiative: Initiative is conceived as the process of thinking out and executing a plan. Since it is one of the keenest satisfactions for an intelligent man to experience, Fayol exhorts managers to sacrifice personal vanity in order to permit subordinates to exercise it.

Esprit de corps: This principle implies that union is strength and an extension of the principle of unity of command. Fayol here emphasizes on the need for teamwork and the importance of communication in obtaining it.