Depreciation Methods with Varying Annual Charges

The question asks to identify the depreciation method where the amount charged to the Profit and Loss (P&L) account changes each year.

Analyzing Depreciation Methods

Different depreciation methods allocate the cost of an asset over its useful life. The key difference lies in how the periodic depreciation charge is calculated:

• Fixed Instalment Method (Straight-Line Method): Depreciation is calculated as a fixed amount each year based on the original cost and estimated useful life. The charge to the P&L account remains constant annually. This method does not result in varying depreciation amounts.
• Diminishing Balance Method (Reducing Balance Method): Depreciation is calculated at a fixed rate on the asset's *book value* at the beginning of each year. As the book value decreases year after year, the depreciation amount also decreases. Therefore, the charge to the P&L account varies (decreases) each year.
• Annuity Method: This method considers the time value of money. While the total expense related to the asset might be constant, the depreciation *component* itself can be complex, but it's typically not the method primarily characterized by varying depreciation charges in the simple P&L sense compared to the diminishing balance method.
• Insurance Policy Method: This method involves creating a sinking fund using an insurance policy. The P&L charge typically corresponds to the annual premium or fund contribution, which is usually fixed.

Conclusion on Varying Depreciation

Based on the calculation method, the Diminishing balance method is the one where the depreciation amount charged to the Profit and Loss Account naturally varies each year, decreasing as the asset's carrying amount reduces.