DepriciationDepriciation is a gradual and permanent

decrease in the value of assets from any cause. (R.N.Carter)

Depriciation may be defined as permanent and continuing diminution in quality ,quantity or the value of assets. (william pickles)

CHRACTERSTICS OF DEPRICIATIONDecrease in the value of assestsGradual decrease Process of allocation not of valuation Permanent decrease in the value of assets

Causes of depriciation

Constant use Effect of timeOn expiry of legal rightsAccidentHuman mistakeObsolescenceFall in priceDepletion

Need ,objectives or significance of providing depriciationTo ascertain true profit and lossAscertainment of correct cost of productionPresentation of correct economic positionArrangement of funds for the re-

establishment of assestsTo prevent the distribution of profits out of

capital To save the income tax

Use of depreciation in other related termsDepreciation- used for physical assetsAmortization- used for intangible assetsDepletion- used for natural resourcesDilapidation- used in contract of lease

Factors determining the amount of depreciationCost of assetsEstimated useful life of assetsestimated scrap value of assets

Methods for recording depreciation

1. provision for depreciation account is to be maintained .

2. provision for depreciation account is not to be maintained..

Methods for providing depreciationFixed installment methodDiminishing installment methodAnnuity methodDepreciation fund methodInsurance policy methodRevaluation methodDepletion method

Fixed instalment methodA certain and equal amount is deducted annually as depriciation.Easy method.Suitable for all type of business.Value of asset become zero at the end of

working life of asset.Depriciation is shown as a direct deduction

from the value of asset in balance sheet.

Demerit of fixed instalmentEqual depriciation is charged every year but

the efficiency of asset decreases with the passage of time.

No provision for interest on investment on asset.

No provision for replacement.Difficult to estimate residual value.Only considers the time duration,not on

actual use of asset.

Application of fixed installment method Applicable for those assets on which repair

and renewal expenses are very less.Applicable on those org. where some assets

have more repair expenses and some have less expenses.

Calculation of depriciationOn the basis of working life of assets= Depriciation=cost of assets-scrap value/ estimated SSWlife of

asset

On the basis of % =Depriciation = cost of asset * rate/100

Diminishing balance methodDepriciation is calculated on the opening

balance of asset every year.Easy calculation of depriciation.In initial year dep. Is more and repair

charges are less and in later year deprication is less and repair is more.so equal effect on profit and loss account.

Value of asset never become zero.Method is permissible under income tax act

1961.

demerit of diminishing balance method Detrmination of suitable rate is tough.Value of asset can not be reduced to zero.No provision for replacement.No provision for interest.Dep. Is more in initial year and less in later

years.If less rate is decided then more years are

required for amortization of asset but asset ended earlier.

Application of methodApplicable on those assets which have more

working life like building plant machinery

Difference in fixed and diminishing methodFixed instalment Diminishing methodAmount of dep. Remains

equal.Calculated on initial book

value.Book value can be reduced

to zero.Rate of dep is kept lower.Effect of dep and repair is

not equal on p&l a/c.This method is not

approved by income tax authority.

Amount of dep. Reduces every year.

Calculated on written down value.

Bookvalue never become zero.

Rate of dep is kept higher as compared to fixed instalment method.

Effect of dep and repair on p&l a/c is equal.

Approved by income tax authority