"Worn Out."
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A Few Notes on the Different Accepted Methods a Providing Against the Old Age of Commercial Motors.
The subject of " depreciation " is one of the many which has continued to receive its contemposary measure of attention at our hands from the earliest days of the existence of THE COMMERCIAL MOTOR. Some few years ago, too long, as time goes now, for us to venture to refer our readers to it, we devoted very considerable space, for a period, to the whole interesting subject of depreciation, " and of its fateful but elusive ally "obsolescence," as they both applied to the commercial-motor industry. We established, to the general satisfaction of many of our friends, the principle that the terms of a motor vehicle's effective capacity must be stated on a mileage and not a time basis, as being the surest giethod of arriving at its useful life. The average assurr1ed, after very Careful consideration, was One of 150,000 miles for machines of ill but very high and low load capacities.
Advantage of Mileage-Depreciation Proposal.
This mileage-depreciation proposal had the very considerable advantage of enabling each owner, with first-hand knowledge of the average performances of the units of his own fleet, to arrive at a satis;actory yearly percentage deduction or charge, suited to his own class of employment. It indicated the life of the lorry, subject to minor corrections for exceptional conditions such as abnormal roads or journeys, overloading on occasion, poorly-designed mechanical details or other than first-hand condition.
How Should Depreciation Charge Be Treated?
Arrived at and satisfied with his, shall we say, 121 per cent. depreciation charge, he Proceeded year by year to insert this charge in his accounts with a view to preserving his original capital value. But the extraordinary thing about the whole • thing is that neither he nor his chartered-accountant adviser has ever to this day been quite clear as to the proper way in which this charge should be treated. And on this subject of accounting method, a paper read a week or two ago before the Institution of Electrical Engineers contained trmeh of constructive interest.
,Four Methods of Depreciation Accounting.
The authors, Messrs. Gill and Cook, illustrated four methods of depreciation accounting, and they are all worth a moment's comparative thought by owners and users of commercial motors. They are : (a) the charging of the fixed percentage against the yearly reducing value of the machine (b) the charging of a sufficient percentage on the constant value of the machine to raise a depreciation fund of equal value during the agreed " life" of the machine ; (c) the annual repayment of a part of the capital and a return on the capital outstanding; and (d) the ordinary form of sinking fund.
The Conditions of Wearing.
Now the conditions of wearing out on an average commercial vehicle are similar to much other plant np to a point. Such machinery depreciates but little in its first few years and then starts on a rapidly inclining descent in the matter of respectability. Indeed, in all but well-maintained fleets, and particularly in cases where the owner thinks his one or two machines should practically look after themselves, the motor vehicle's final decline in life is certainly more fearsome than, shall we say, that of the locomotive, of marine engines or of stationary plant of many Only the system of depreciation which properly hearsicharges that take into account the high zervice of its younger days and its oft-time degenerate old age can be properly justified. If this happens to be a method which will require few accountancy gymnastics, it will have that chance of general adoption which a more scientific, albeit more abstruse, approach to perfect book-keeping would deny it.
The Best and Simplest Method.
Of the four systems discussed by the " Institute Of Electricals," and indicated above, the second is at once the simplest and the most-closely applicable to motor-vehicle conditions and for these reasons. The machine is supposed to earn not less than 5 per cent. on its prime value all its life ; it Will pay its own interest on capital invested until it is finally " worn. out." In addition, if an agreed percentage based On ' the mileage-life of the machine, is paid into the depreciation fund yearly,,such fund's own interest earnings may, if thought desirable, reduce the necessary rate substantially. The reduced value of the machine yearly is, in fact, uniform and not retrogressive.
This method ensures that as the real earning capacity of the machine decreases in its later years, the interest from the increasing depreciation fund is available to balance it. It, too, involves constant annual charges, of which the simplicity is the principal recommendation to the owner, together with the fact that he is not dependent on the interest of his depreeiation fund to square his accounts. He can turn it to account if he like.
The Reducing and Balance Method.
The first, or reducing-balance method, provides that the value of the machine falls very rapidly at first and more slowly as time goes on, which is not accurate for motor vehicles. It presents annual changes in value and changes which will not appeal to the small owner nor indeed to many a bigger one.
The Annuity Method.
The third, the annuity method, is correct in its incidence, but will make little appeal to the owner, for obvious reasons ;. it involves the assumption that the interest return from the depreciation fund will be constant during the *hole life of the machine. The fourth is really only a book-keeping variant of the third.
While experts will, we anticipate, continue to differ as to the propriety of these various methods of providing against the time when our vehicles will wear out, most owners, we repeat, will plump for the constant charge and regularly-decreasing value as being simplest and as in its increasing result keeping proper company with the reduced earning capacity of the plant.
We have said nothing. of fashion.; much of it is being settled for us on the battlefields of the world. The risk of change is great at. the moment, and is one to which the owner should be alive.
The "Wearing-Out" Factors.
As to mileage life, peace-time figures must be at present regarded suspiciously. Unskilled drivers, excessive hours, minimum inspection and overhauling, maintenance nearly nil, bad roads and many other factors are pressing many a good machine, in national service, rapidly to the stage of being "worn out" long before it is in danger of being superseded.