Tax Depreciation Schedules Australia for Property Depreciation Schedule.
Depreciation accounting.pptx
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Transcript of Depreciation accounting.pptx
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Fixed Assets andDepreciation Accounting
LECTURE 6 1
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Correct perspective of long term
assets or fixed assetsThey have a useful life of more than a year
They are used in the operations of
business
They are not intended for resale to
customers.
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Fixed Assets Accounting
Accounting for fixed assets involves dealing
with following questions:
1. Determination of cost of acquisition of
fixed assets
2. Allocation of cost of fixed assets over its
estimated life
3. Accounting of disposal of fixed assets.
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Cost of acquisition
Cost of a fixed assets comprises its purchase
price, import duties and taxes on purchase and
any other directly attributable costs of bringing
the asset to working conditions for its intendeduse.
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Following expenditures relate to the import of a
chemical plant:
1. Customs duty on the plant
2. Clearing charge paid to the port trust.
3. Demurrage for delay in clearing the
consignment
4. Freight5. Transit Insurance
6. Repairs of some part damaged while the plant
was unloaded at the port.LECTURE 6 5
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Some related aspects
Capitalization of Borrowing Costs: Interest
paid in connection with the loan paid to
acquire any fixed assets is added to the
cost of that particular fixed asset till thepoint of commencement of production. .
Such expenditure will be treated as
revenue expenditure after commencementof production.
LECTURE 6 6
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Basket Purchases
Some times a group of fixed assets may be
purchased at a single lump sum price. In
that case the total purchase price would
be allocated among the various assets onthe basis of their relative fair value. This
fair value is usually determined by
professional valuers.
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For example if a firm pays Rs 2,50,000 for a
building as well as land on which it is
situated, how much should be taken as
value of building and how much should betaken as value of land when the expert
valuer fixes the market value of building at
Rs 280000 and that of land as 120000.
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Depreciation
Definition
Difference between Depreciation,
Depletion ,Amortization
Basic Features of Depreciation
Causes of Depreciation
Objectives of providing DepreciationFactors affecting the amount of
depreciation
Methods of Recording DepreciationLECTURE 6 9
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Depreciation
Depreciation is the gradual and permanent
decrease in the value of asset from any
cause: By Carter
Depreciation may be defined as the
permanent and continuous diminution in
the quality, quantity and value of an asset:
By William Pickles
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Features of Depreciation
The term depreciation is used only in
respect of fixed assets
Depreciation is a charge against profits
Depreciation is different from maintenance
Decrease in value of assets is permanent
and perpetual.
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Causes of Depreciation
Wear and tear
Exhaustion
ObsolescenceEfflux of time
Accidents
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Depletion: This term is used in relation to
natural resources such as mines, oil wells
etc
Amortization: This term is usually used in
respect of intangible assets like patent ,
copyrights, goodwill etc.
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Depreciation Accounting
Depreciation accounting is a system of
accounting which aims to distribute cost or
other basic value of a tangible fixed assets
less salvage value (if any) over theestimated useful life of that particular asset
in a systematic and rational manner.
It is process of allocation and not valuation.
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Objectives of Providing
DepreciationAscertainment of true profits
Presentation of true financial position
Replacement of assets
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Factors affecting the amount of
DepreciationCost of the assets
Estimated scrap Value
Estimated useful life
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Cost of the asset: This is the cost
incurred in making asset available for use
at the first instance. This amount is
specific and known at the time ofacquisition of the asset.
Salvage value: This is the expected sales
value of the asset at the end of its usefullife.
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Useful life: It is the period for which the
asset can be used for production.
Depreciable Cost: This is the original cost
of the asset less its salvage value.
Book Value: It is the original cost of the
asset less depreciation to date. This is
also known as WDV .
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Method of recording
DepreciationDepreciation can be recorded in the books
of accounts by two different methods:
1. when a provision of depreciation account
is maintained
2. When a provision of depreciation
account is not maintained.
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Methods for providing
depreciationStraight Line Method or fixed installment method
Reducing Balance Method
Some other methods
Depletion method
Sum of years digits method(SYD) method
Machine Hour rate method
Group Depreciation method
Depreciation or Sinking Fund method
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Fixed Installment method or
Straight line method
According to this method the amount of
depreciation is calculated as follows:
Depreciation= cost of asset- scrap value
Life of asset
Depreciation to be charged can also be expressed
as percentage of cost.
R = D*100C
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For example, an asset has been purchased
for Rs 10,000 and it will have a scrap
value of Rs 1000 at the end of its useful
life of 10 years the amount of depreciationto be charged every year :
Depreciation = 10000-1000
10 years
= Rs 900 each year or 9%
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Merits:
This method is simple to understand and easy to
apply.
Demerits:
1. This method does not takes into account the
effective utilization of assets
2. Total charge for the use of assets goes onincreasing from year to year thought he asset
might have been used uniformly from year to
year.
. LECTURE 6 23
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Diminishing Balance Method
This method is also called as Reducing
balance method.According to this method
depreciation is charged on the book value
of assets each year.
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For example if the cost of an asset is Rs
20000 and the rate of depreciation is10%,
the amount of depreciation to be charged
in the first year will be Rs 2000.
In the second year depreciation will be
charged at 10% on the book value of
asset( Rs 18000) and so on.
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Advantages:
Total charge for the use of assets remain
constant each year.This method is also simple to understand
and easy to use.
Demerits: It is difficult to calculate therate of depreciation
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Depletion Method
This is also known as productive output method.
According to this method the charge of
depreciation will be based on the following
factors:1. Total amount paid
2. Total estimated quantities of output available
3. Actual quantity taken out during the accountingyear.
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For example if a mine is purchased for Rs
20,000 and it is estimated that the total
quantity of mineral in the mine is 40,000
tonnes, the rate of depreciation per tonnwould amount to 50 paise per tonn. In
case the output in a year amounts to
10,000 tonnes, the amount of depreciationto be charged to Profit and loss account
would be Rs 5000.
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Suitability: this method is suitable where the life
of the asset can be estimated in terms of output.
Eg. Ore deposit, oil deposit
Advantages: Here the amount of depreciation iscorrelated to the productive use of asset
Disadvantages: It requires making of a
reasonably correct estimate of the amount of
likely output otherwise amount charged by way
of depreciation will not be correct.
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Sum of years digits method
This method is on the pattern of Diminishing
Balance Method. The depreciation is
calculated according to the following
formula:Remaining life of asset(including current year)* cost
Sum of all the digits of the life of the asset in years
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For examples, if the cost of an asset is Rs 10,000 and it
has an effective life of 5 years, the amount of
depreciation to be written off each year will be:
1st year = __ 5_____ *10,000
1+2+3+4+5
= 5 *10000 =Rs 3,333
15
2nd year = _4__ * 10,000 = Rs 2,666
15
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Machine hour rate method
Also known as Service hours method. This
method takes into account the running
time of asset for the purpose of calculating
depreciation. Amount of depreciation iscalculated as follows:
Original cost of asset- scrap Value
Life of asset in hours
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For example, if a machine having a scrap value of Rs 1000
is purchased for Rs 20,000 and has an effective life of 10
years of 1,000 hours each, the amount of depreciation
per hour will be computed as follows:
Depreciation = original cost- scrap value
Life of asset in hours
Rs 10000- Rs 1000 =
10,000 hours
Re .90
If the machine runs for 600 hours the amount of
depreciation will be 540,( Re 0.90*600)
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Advantages: This method has the
advantage of correlating the charge for
depreciation to the actual working time.
Disadvantages: This method can only be
used in case of assets whose life can be
measured in terms of working time.
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Group Depreciation Method or
Block Depreciation methodUnder this method all assets, generally
having similar average life expectancy are
grouped together as a single block.
Depreciation is charged for the group in total
and not item by item.
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Depreciation or Sinking Fund
Method.According to this method, the amount
charged by way of depreciation is invested
in certain securities carrying a particular
rate of interest. The amount received asinterest is also invested along with the
annual amount charged by way of
depreciation. At the end of the life of theasset, securities are sold away and money
realized is used to purchase of a new
asset. LECTURE 6 36
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Selection of a suitable
depreciation methodAS 6 does not specifies the method of allocation
used by the management.
Ideally method chosen should go according to
the concept of periodic matching of cost andrevenue.
Practically the factors like simplicity, savings in
record keeping costs, tax laws and legal
requirement influence the choice of method.
Companies Act, 1956 permits to choose
between SLM and WDV method.
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Change in the method of
depreciationTwo different situations:
1. Change in the method of depreciation
may be desired from the current year on
wards(prospective change).
2. Change in the method of depreciation
may be desired from a back date
(retrospective Change).
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Accounting for disposal of fixed
assetsWhen assets becomes useless, they are
scrapped(discarded), sold or exchanged
for new assets.
On disposal, the cost as well as
accumulated depreciation is removed from
the books.
Disposal value is very rarely equal to itsbook value , so gain or loss on disposal
needs to be recognized.
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