Depreciation

Depreciation Accounting Prof. Sarbesh

Mishra, M.Com, M.Phil, PhD.

University of Delhi

Dr Sarbesh Mishra

1

Concept of Depreciation According to Pickles “Depreciation is the permanent & continuing diminution in the quality, quantity or value of an asset”. From different definition it can be concluded that depreciation is a gradual decrease in the value of an asset from any cause. Dr Sarbesh Mishra

2

Depreciation is loss of value of an asset: (AS-6) of ICAI •

It is a measure of wearing out, consumption or other loss of values of a depreciable asset arising from use & passage of time.

Applicability except: • Forest, Plantations • Wasting Assets e.g. Natural Gas • Expenditure on R&D Dr Sarbesh Mishra

3

Contd… • Goodwill • Livestock e.g. Cattle, Animal Husbandry Depreciation as per IT Act 1961 ( A.Y 2005-06) • Building: 5% (Res.) / 10% (Others) • F & F: 15% • P & M: 20% • Computer: 60% (Includes software) • Intangible Assets: 25% • Books & periodicals: 100% Dr Sarbesh Mishra

4

Causes of Depreciation • Wear & Tear – Due to constant use of P&M, F&F used in the plant. • Exhaustion – An asset may get exhausted through working e.g. mineral mines, oil wells etc.

• Obsolescence – Some assets are replaced because of changed condition. • Accident – An asset may meet an accident & its value gets depreciated. Dr Sarbesh Mishra

5

Features of Depreciation • The term depreciation is used only in respect of fixed assets & current assets. • Depreciation is a charge against profits. This means true profit cannot be ascertained without charging Depreciation. • Depreciation is different from maintenance. Maintenance expenses are incurred for keeping machine in a state of efficiency. • All fixed assets with certain exception e.g. land, antiques etc., suffer from depreciation. Dr Sarbesh Mishra

6

Depreciation, Depletion, Amortization & Dilapidations • Depletion: Removal of an available but irreplaceable resource such as extracting coal from a coal mine or oil out of an oil well. • Amortization: The process of writing off intangible assets like patents, copy rights, leaseholds is termed as Amortization. • Dilapidations: The term dilapidation refers to damage done to a building or property during tenancy. Dr Sarbesh Mishra

7

Meaning of Depreciation Accounting According to AICPA “Depreciation Accounting is a system of accounting which aims to distribute the cost or other basic values of the tangible capital assets less salvage (if any) over the estimated useful life of the unit (which may be group of assets) in a systematic and rational manner. It is process of allocation & not of valuation”.

Dr Sarbesh Mishra

8

Objectives of Providing Depreciation 1. Ascertainment of true profits: When an asset is purchased, its nothing more than payment in advance for an expense. E.g. The amount paid for the purchase of building be charged over a period of time for which asset would be serviceable.

Dr Sarbesh Mishra

9

Contd…. 2. Presentation of true financial position: Assets gets depreciated in their value, in order to present true state of affairs of the business, the assets should be shown at their proper values.

Dr Sarbesh Mishra

10

Contd… 3. Replacement of Assets: Assets needs to be replaced after the expiry of serviceable life. By providing depreciation a part of the profits of the business is kept in the business which can be used for purchase of new assets on the old fixed assets becoming useless. Dr Sarbesh Mishra

11

Fixation of Depreciation Amount 1. Cost of the Asset: Invoice Price of the Asset Less: Any trade discount Add: Misc. Expenses Total

------xxx

Misc. Expenses includes any cost incurred to bring the assets to useable condition.

Dr Sarbesh Mishra

12

Contd… 2. Estimated scrap value: Scrap value means the residual or the salvage value which is estimated to be realised on account of the sale of the asset at the end of its useful life*. * - Cost incurred in disposal or removing of the asset should be deducted out of the total realizable value.

Dr Sarbesh Mishra

13

Contd… 3. Estimated Useful Life: Otherwise termed as economic life of the asset. This may be calculated in terms of years, months, hours, units of output of other operating measures such as kilometers in case of taxi or truck. Dr Sarbesh Mishra

14

Methods of Recording Depreciation 1. When Provision for Depreciation Account is Maintained •

For Providing Depreciation:

•

Depreciation A/C Dr. To provision for depreciation A/C For transfer of Depreciation to P/L Account P/L Account Dr. To Depreciation A/C Dr Sarbesh Mishra

15

Contd… 2. When a provision for depreciation account is not maintained • For providing depreciation:

•

Depreciation Account Dr. To Asset Account For transfer of depreciation to P/L A/C P/L Account Dr. To Depreciation Account Dr Sarbesh Mishra

16

Change in the method of Depreciation • Change in the method of depreciation may be desired from the current year onwards. Then depreciation will be charged according to new method from current year. • Change in the method of depreciation may be desired from back date.

Dr Sarbesh Mishra

17