2. 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.”
3. 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
4. Depreciation Accounting
Causes of Depreciation
Use/consumption
Efflux of time
Abnormal factors
Obsolescence
5. Depreciation Accounting
Need 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
6. Depreciation Accounting
Accounting for Depreciation
(C)Methods of determining the amounts of
depreciation.
(B) Accounting treatment
8. Depreciation Accounting
Fixed Instalment Method/Straight Line Method
CALCULATION OF DEPRECIATION
Original cost of asset – Estimated scrap value
Life of the asset
10. 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
12. 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
16. 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.
Goodwill
Livestock
Land, unless it has a limited useful life for the
organisation
17. Depreciation Accounting
Change in the method of Depreciation
Statutory requirement arises
Compliance with the Accounting Standard
If the change would result in a more
appropriate preparation or presentation of the
financial statements
18. Depreciation Accounting
Disclosure in Financial statements
Historical cost of each asset
Total depreciation for the period
The method of depreciation being used
Rate of depreciation
Useful life of the asset