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
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