Depreciation Accounting

Depreciation Accounting

Definition A measure of the wearing out, consumption or other loss of value of depreciable assets arising from use, efflux of time or obsolescence through technology and market changes.”

Depreciation Accounting

Definition Analysis

Allocation of depreciable amount of a fixed asset over its estimated useful life

Depreciation is a non-cash expense and is charged to Profit & Loss a/c each year

Depreciation is based on cost of asset

Depreciation Accounting

Causes of Depreciation

Use/consumption

Efflux of time

Abnormal factors

Obsolescence

Depreciation AccountingNeed for charging Depreciation

To ascertain the true & fair profit or loss of the organisation

To reveal the true & fair financial position of the organisation

To provide funds for replacement

To compute the correct tax liability

Depreciation Accounting

Accounting for Depreciation (A)Methods of determining the amounts of depreciation.

(B) Accounting treatment

Depreciation Accounting

(A) Methods of determining the amounts of depreciation

2 methods

Depreciation Accounting

Fixed Instalment Method/Straight Line Method

CALCULATION OF DEPRECIATIONOriginal cost of asset – Estimated scrap value Life of the asset

Depreciation Accounting

Original Cost of the Asset

Depreciation Accounting

Original Cost includes - Payment to vendor- Transportation- Customs duty, in case of import of asset- Transit Insurance- Commission paid on purchase of asset- Installation charges- Initial repairs to second hand assets- Registration cost- Special costs incurred

Depreciation Accounting

Estimated Scrap Value

Depreciation Accounting

Life of the Asset

Factors Responsible

- Nature of the product- Quality of machine- Legal requirements- Use of machine- Maintenance of asset- Replacement policy

Depreciation Accounting

Diminishing Balance Method/Written Down Value Method

Depreciation Accounting

(B) Accounting treatment

Depreciation Accounting

AS – 6 Depreciation Accounting

Depreciation Accounting

APPLICABILITY

Forests, plantations and similar regenerative natural resources.Wasting Assets – Oil wells, Coal mines etc.Expenditure on research and development, whether successful or unsuccessful.GoodwillLivestockLand, unless it has a limited useful life for the organisation

Depreciation Accounting

Change in the method of Depreciation

Statutory requirement arisesCompliance with the Accounting StandardIf the change would result in a more appropriate preparation or presentation of the financial statements

Depreciation Accounting

Disclosure in Financial statements

Historical cost of each assetTotal depreciation for the periodThe method of depreciation being usedRate of depreciationUseful life of the asset

Depreciation Accounting

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