DEPRECIATION 10

CHAPTER

Introduction - Mcaning and Dcfinition of Depreciation - Change in Method of

Depreciation - Disclosures - Auditor's Duty.

INTRODUCTION
The term "Depreciation" has been derived from a Latin word "Depretium", which means
ecrease in the valuc of fixcd assets. The assets decrease in this way due to natural wear and tcar
or eflux of time. It refers to the gradual diminution, loss or shrinkagc in the utility value of an
A5set on account of wcar and tear in use, cfflux of time or obsolescence.
Depreciation accounting aims at distributing the cost ofbasic value of tangible capital assets,
les salvage over the estimated useful life of the assets in a systematic and rational manner.
Depreciation is no way connectcd with fluctuation, which is due to external causes. On the other
hand, depreciation is connccted with internal causes.
MEANING AND DEFINITION OFDEPRECIATION
The cost of fixcd assets is nothing but the price paid for a series of future services. Hence, it
is essentia) that the cost of the fixed assets be spread over anumber of years during which benefit
of the assets is derived. This process of spreading the cost of fixed asset over its useful life is
lmed as depreciation. Thus, depreciation is an expense in cach of the accounting periods in
Which the asset
provides service to the cnterprise. It is an expense just like the expenscs incurred
on rent, salaries, fire insurance premium, and carriage. Depreciation is the cost of use fulness lost
costwords:
following of diminution of service yield from afixed asset. It has been defined in the AS 6in the
"Depreciatlon is a measure of the wearing out, consumption or other loss of value of a
depreciable asset arising from use, eflux ftimeor obsolescence through technology and market
anges. Depreciation is allocated so as to churge afairproportlon of the depreclable amount in
c dccounting perlod during the expected useful life of the asset. Depreciation
amortisation of ussets whose useful life ls predetermined". includes
Depreciation has a significant effect in deternining and presenting the financial position and
SO1 operations of an enterprise. It is charged in cach accounting year by
OT he depreciable amount, irespective of an increase in the market value of reference to the
the assets.
ne assessment of depreciation as well as the amount to be
charged
CCounting period are, usually done on the basis of the following three in respect thereof in an
factors:
 Deveckate
Asets
rn u
been
I
àdnNie tehst
eww* ywmNel wnNt Nixe

hx tvkhoal v
al the r
RNnrke ie of
ratlhits nAhvuT hishUNalnsof
vaw
of te
the
aNYA othe axwet.
deyvniable
the
Ar depuviable lome,
than n dewiable
asset. where
stNh Me asse.
its unE the
as
phsical asset asset
the d
not (will
crpiry i for has
period: be
the of considered
dates and purpase good amd
PRACTICAL
AUDITE
revalued,
is: enterprise;thor
e
of and for
relatsd sale of
services,
purpa
he he
amo

lea in
ta j
pEP
 Need the mrebased
2
Provisioa 1. provsion
must and wi
If
wil Depreciaion l for Determination
hicur on (i)by
nt (u)
se e
the treated ()
( T
be tear over Providing vznous (c) (b) (3) astdeeant
tecaaiogial Qsr * yAS As
fixed not for offer legal
atach
accounted and be as chang
estimate depreciation s an is aÀY
efilux assets corectly cost factors of or agan
refers
Depreciation asset
serice W thc other obslesar veet in
or of
for ofthe are expense useful mrit
depenis
ud the kgalnt by fa
nchud1ng
using restnctons changes dprncable
time,
in value assessed. the to is
shown n extent
arder but pruturdn rpar
andnecessary Dew life demand a
tbe of s
continuously cost neverthelcss expenence ofa arsing peial an d of
value the debited
to Iechnology us
show of depreiable asts
assets fa muntenant
on mhis; frm nd tal srir
the the
of to he th
fixed
the
hrter
possessed at thfollowing e with product such factrs, physial
assets assets their Profit required or livs, as
asset used
similar asset factorspoicy than Cm
at is in or deterioration sch sNh
their muchoriginal and onthe is
by used
grounds: aservice its
the Loss some bpesmater as: ofas, phsical
as
proper less. up production the the
firmworth output the
Account; in reasonable of cnterprise ctc.;
and
number
the assets. of
estimation oncxpiry life nsilerndwillbe
herefore, when in
value. account
thel period. of of dates and ened purpse
fsak the
really, the of
ocherwine basis. new Such a
asset;or shifts is:
fîom
reahed
PRACTICAL en
eAUDID
Balance nomayand is ofrelated
of
depreciatioa due
to the
This product
estimtu for wear th e
senisend

we Sheet pro mut u

which and ka
er
Value Concepts.
ditterent a the Jears and cense to the whether Alyso depreciation provision.resouresbe
unsideraion Ca(bshy
"Historical is Depreclation
Nhe Noture of
on car which asset, Deprviation
erease
lmpaired
or
to
comparison. standard
Dmerence
4.
Amortized
for
cost. 2. 1.Professor price with tAssets,
Decrease
They
technical
pai d
object
and
in
the twhich
he valuc the cost
t hc on "ln
a
The
on
leaks
ensuring r

is
Accounting
calculated

for
esinutnnxess

ofvaluation life
neiation
ourse
mlan is
Lnshane hieh
caleulated.
h NECLATON
asSet
nhenthe
in on ase ' otberensEs,
sane good Aount ry al
in Bonbright
are: business. ofmaintenance the depreciation.
providing
ofbusincss
on
time. on nust asset intact l
viceableness. in the are footing of measures boy depreciation th e in iss dea
inthe in value. ofearning State boilers th e be its is
value value meanings installing more th e distributed at
popular asset well actualThus,ilustration of Profit
ofdebited
Further,
canung
prchased behind debitthein
Expenditure
in of Method". has th at
to between or as are the the depreciation. asset.
itIsually and
show it_
his le ss ha Repair"
wages
s Maintenance cost is year. capaciy. lifehere
the
sense attachedbook, revenue
cost. repairs fixed amount
asset fund
a
to the
of This Loss Profit over the
when
owner. deteriorated
constantly use,in and method, process Only pruvision over. is o
in
of comet MyeniProtit L0ssant
an on is once,is at is Neither th e been an Account business a a
of existing "Valuation is usually maintained not byDepreciation an cxpense. totally is the and Such number
decrease to treated acquiringrowmaterials. usually which Insurançe of asset of used
witten asset Loss
the whether assets allocation a value of is
although replaced under up unfair, ifthe willdecrease foruse of achually
old word as calculated the offby The Account. depreciation
in ofcapitalnaturally included portion of years of Account retainedare
value assets such whether in is whole
become the
"Depreciation" Property", Depreciation broken value policy
"Conventional
a not using unjustified inand nade.
assets, separately, it state value costof way vaue its toasset r
nay and expenditure, is of accumulated up of Ifit which
diminish being
depreciation. parts the an method)
in
of nor
assets
of of or the aconstant
mere is is
on
in Thcse
refer hypothetical which buildings asseteficiency depreciation.
the and loss, not lie particular the a
pointsout kept are consumption the
thereforo iscurent calculated asset is against scrap, isdone, any use Balance can
either are such wil in in and
inmediately falls separately. onlya Accounting charged
asset
businesss bethein
to othercauses
variants expenditure value atreated are is costs correct
it remains used
to new substantialy thatal be good The through financial bot the
Depreciation business would Sheet.asset
decrease held due measures ascostpainted a period and of to business
depreciation or is
for
asset state Accumulating allocated toassetthein
substitute ar e an the profits
replacement
of over to ofkeeping replaced
an time, procecure System" principles.Profit epense, be Hence,in to
fo ur their operating
of the regularly, taken ofits use. keep because
in aken includesseveral repair.extent cannot
heavy
a
murket Thi s is 165
as basic wear and for into orlie. not and the the
a
168

1. Sralght lIne
Method
PRACTICA A DEPRECIATION
169
percentage of originalcost is written off the anountofdepreciation,
Underthis method,afixed per cent deprcciation were considered is paid by way of premium every year.
adequatas etee,verRslyundet09. The amount goes on
the
and 10
ifan asetcosts Rs.20,000 amount to be written off every year is
The arrived
ya
withthe insurancc company at a certain rate of interest and is paid back to
The
accumulating
the insured the
be witten off every year. at as maturity of the policy. amount so made available by the
Cost minus Estimated Scrap Value Durchasinganew asset.
This method to a
great extent is similar insurance company is used for
to sinking fund mehod, but no
Estimated Life doubt t the procedure is a litle different. In this method,instead ofbuying securities,the
policy istaken and premium is paid every year. Company, receiving premium, allows ainsurance
The period for which the asset is usediin a particular year should also be of interest on compound basis. small rate
This method is simple in calculation and also in such a case. the itaken
nto v
charge to the a ie method is a more suitable device for ensuring the availability of cash to replace the
Account is uniform every year. This method is
useful when the service Proft asset.
rendered
uniform from year to year. It is desirable, when this method is in use, to estimate theby the u
amunder
de advantage under this system is that the company need not
he Depreciation Fund Method, will be sold at worry whether the investments as
best prices or
spent by way of repairs during the whole life of the asset and provide for; wken, it serves two purposes. Frstly, it insures the asset. Secondly, not. If an insurance policy is
2verage actual repairs. repairs eachyanfhe stioulated amount to enable the company to replace assets. the insurance company will
This method is more expensive
the insurance company has to keep its margin of
he ssset is definitely known. It yields a very lowprofits. It is suitable for losses where the life of
2. Witen Down Value Method
Under this method, the rate or percentage of depreciation is fixed, butit applics to e once-levelchanges. rate of interest. It makes no adjustments for
which the asset stands in the books in the beginning of the year. In other words, under
afoxed percentage is writen off every year on the reduced balance ofthe asset. Thus,
of depreciation is not applied to the original cost but only to the balance, thenere Sum of the Diglts Method
which remuin Under this method, amount of the depreciation to be written off each year is calculated by the
charging depreciation in the beginning ofayear. The percentage of depreciation rematns iu following formula:
all the years of the working life of an asset but the actual
amount of depreciation writen of:
ycar goes on decreasing with the reduction in the value of the asset. Remaining Life of the Asset (including the Current Year)
x Cost of the Asset
3. Annuty Method Sum of all the Digits of the Life of the Asset in Years
Tbe annuity method takes into account the interest lost on the acquisition of an asset ic 10 Suppose the life of an asset costing Rs.50,000 is 10 years. The sum of all the digits from 1to
is calculated on the book value of the comes to 55 i..
asset at the current rate
credited to interest account. The amount to be written off asand debited to the asset accou year will be: 10+9+8+7+6+5+4+3+2+1 =55. The depreciation to be provided in the fust
depreciation
anmuity tables. The depreciation will be different according to the rate of is calculated fne
the peniod over which the asset is to be written off. interest and accut 10 -x 50,000 or Rs.9,091
that require considerable investment and Annuity method is much suited to tbog 55
plant and machinery wbere additions arewhere frequent additions are not made. Itis potsu In the second year, it will be:
4. Depreclation Fund
usually made quite often.
Method x50,000 or Rs.8,181
Under this method, the 55
worn out. This amount amount of
depreciation goes on accumulating till the asset is coap This method is similar to the Written Down Value Method described earlie.
depreciation is fixed andbecomes readily available forthe
replacement of the asset. Theanx 1. Revaluatlon Method
every year th°ough the renainsof the same year after year and is ito Profit and LossAo
amount of annual creation is Depreciation Fund. Itisi otherwise chargedknown as SinkingPul S ethod is used only in case of small items like cattle (Livestock), or loose tools where it
interest at a specifeddepreciation
rate. Theinvested outside the business every year ingood securiieste ybe ton much to maintain an account of each single item. The amount of depreciationto be
interest received goes on till the timeprocess investing the amount of depreciation togeten otf is determined by comparing the value at the end of the year (valuation being done by
of
sold out and with cash of cecu
very costly assets received, the replacement
new asset is of asset. At this time, all thefimlo pupPoseone having expert knowledoe of the valuation of the asset) with the value in the begnning.
wihout any purchased. This method enables a on I" were
Worh of tools April purchased.
2,007 the value
Now ofif loose toolsof was
at the end Rs.10,000
the year, and tools
the loose duringaretheconsidered
year Rs.30,000
to be
Insurance Pollcy Methoddifficulty
in
5
arranging cash resources. Worthhonly
Under this method the or CaplBal
Redemptlon Rs.25S,000the depreciation comes to Rs.1s,000 i.e. Rs.10,000 +Rs.30,000-Rs.25,000.
policy is such that it is business takes apolicy from an Pollcy Methoo Theamout Depletlon Method
sufficient to replace the asset wheninsurance
it is
company, Th
ichis This method is used in case of mines, quarries, et., where an estimate of total quantity of
worn out. Casy utput likely to be
available should be available. Depreciation is calculated per ton of output. For
 168

SraightUne
Method
of original
costis
percenlagedepreciation were written off the
PRACTICALA DEPRECIATION
heamountof depreciation, is paiddbby way of premium every year. The arnournt goes on accumulating
169

rivedas eatteev,aseryR2
1.

ifanassetcosts
method,afixed
Underthis Rs.20,000and10per ccnt written
ycar. The
amountto be
consideredaradequat
off every year is heinsurance company at a ceraun rate of interest and is paid back to the insured at th
maturityof the policy. The amount so made available by the insurance company is used for
bewriten
offevery
Cost minus Estimated
Scrap Value under Curchasing a new asset. This method to a great extent is similar to sinking fund method, but no
doubt the procedureis alittle different. In this method, instead of buying securities, the insurance
Estimated Life
policyistaken and prernium is spaid every year. Company, receiving premiun, allowsasmall rate
The penodfor whichthe asset is used ina particular year should also be taken itn compound basis.
af iatereston
This method is simple in calculation and also in such a case, the charge to the Proft e suitable device for ensuring the
when the This method is a more availability of cashto replace the asset.
ycar. This method is useful service rendered antage under this system is that the company need not worry whether the investments as
Account is uniform cvery
this method is in use, to by t The he Depreciation Fund Method, wll be sold at best prices or not. If an
It is desirable, when estimate ander
the insurance policy is
uniforn from yearto year. the whole life offttbe asset and provide for zken, it servestwo purposes. Firstly, it insures the asset. Secondly, the insurance company will
spent by wzy of repairs
2verage actual repairs.
during
repairs cachya
paythesstipulated
amounttto
t enable the company to replace assets. This method is more
expensive
Wrten Down Value
Method sthe insurance company has to keep its margin of profits. It is suitable for losses where the life of
2.
Under this method, the rate or percentage of depreciation is fixed, but it applies to te teprice-level
sset is changes.
definitely known. It yields avery low rate of interest. It makes no adjustrnents far
which the 2sset stands in the books inthe beginning of the year. In other words, under thiyd 6 Sum of the Digits Method
the reduced balance of the asset.
afixed percentage is written offevery year on Thus, herengp Under this method, amount of the depreciation to be written off each year is calculated by the
of depreciation is not applied to the original cost but only to the balance, which
charging depreciation in the beginning of ayear. The percentage of depreciation remi following formula:
all the ycars of the working life of an asset butthe actual amount of depreciation writn dt:
year gocs on decrezsing with the reduction in the value of the asset.
Remaining Life of the Asset (inchuding the Curent Year)
x Cost of the ASset
Sum of all the Digits of the Life of the Asset in Years
3. Annuty Method
The annuity method takes into account the interest lost on the Suppose the life of an asset costing Rs.50,000 is 10 years. The sum of all the digits from 1 to
is calculated on the bo0ok value of the asset at the current rate and acquisition of an asset 10 comes to 55 i.. 10+9+8+7+6+5+4+3+2+1 = 55. The depreciation to be provided in the frst
debited to the asset aooa vearwill be:
credited to interest account. The amount to be written off as depreciation is calculaled
anmuity tables. The depreciation will be different according to the rate of interest and acz =
10
x 50,000 or Rs.9,091
the penod over which the asset is to be written of. Annuity method is much suited to tgr 55
that require considerable investment and where frequent In the second year, it will be:
plant znd additions are not made. Itis not s
rnachinery where additions are usually made quite often.
4. Depreciatlon Fund Method x50,000 or Rs.8,181
$5
Under this method, the amount of
worn oul. This amount becomes readilydepreciation goes on accumulating till the asset is car Tais method is similar to the Written Down Value Method
described earlier.
depreciation is fuxed and rermains the sameavailable for the replacement of the asset B.
year after yearrand is charged ito Profit and Losk Revaluatlon Method
cvery year th°ough the creation of
armount of 2rmual depreciation is Depreciation Fund. It is otherwise known assSinking This
be method used l only in case of small items like cattle (Livestock), or loose tools whereit
fe is
interest at a specified rate. Theinvested outside the business every)yearin goodseouriio ayen l00 ofr much to maintain an account of cach single item The amount of
depreciation to be
interest received goes on process of investing the of depreciation
loge Is deternined by comparing the value at the end of the year (valuation being done by
sold out and with tillthe time of amount secu S e naving
replacement of asset. At this time, allthe expert knowledge of the valuation of he asset) with the value in the beginning.
very costly assets cash received, the new asset is ppurchased. This method enables afirmlo Suppose on 1" April 12,007 the
without any difficulty in Worh of tools were purchased. value of loose tools was Rs.10,000 and during the year Rs.30,000
6.
Insuronce Policy Method or Capltal arranging cash resources. Now if at the end of the year, the loose tools are considered to be
worh onlyyRs.25,000 the depreciation comes to Rs.15,000 i.e. Rs.10,000 +Rs.30,000--Rs.25,000.
Under this method the Redemptlon Pollcy Method
policy is such that it is business takes a policy Theano Depletlon Method
sufficient to replace the assetfromwhenan insurance company. whichs This
it is worn out. Cash, Output likelymethod is used in case of mines, quarries, etc., wbere an estimate of toal quantity of
to be aavailable should be available. Depreciation is calculated per ton ofoutput For
170 PRACTICAL AUDm
exaple, ifa mine is purchased for Rs.20,00,000 and it is estimated that the total quantit
DEPRECIATION

, The depreciation methods used, the total depreciation for the period for each class of
171

depreciation per ton of output comes to- assets, the gross amount of each class of depreciable assets and the related accurmulated
5,00,000ton, the
mineral in the mine s 20,00,000
depreciation should be disclosed in the financial statements along with the disclosure of
Rs.4.
=
other accounting policies. The depreciation rates or.the useful lives of the assets should
5,00,000 be disclosed only if they are different from the principal rate specified in the statute
Ifthe outputin the firstyear is 30,000 then the depreciation will be 30,000>xRs.4=Rs.1200 governing the enterprise.
depreciation to be written 2 In case the depreciable assets are revalued, the provision for depreciation is based on the
output may be 50,000 ton; the off wil
inthe second year, the revalued amount on the estimate of the remaining useful life of such assets. In case the
Rs.2,00,000 ie., 50,000 x Rs.4. revaluation has amaterial effect of the amount of depreciation, the same should be disclosed
separately in the year in which revaluation is carried out.
Mochine Hour Rate Method
Instead of the usual method of t. , 1. Achange in the method of depreciation is treated as achange in an accounting policy and
This is more or less like the depreciation method. it should be disclosed accordingly.
the life of a machine in years, it is estimated in hours. Then, an accurateTecord is kent ros
e
calculated accordingly For
the number of hours each machine is run and depreciation is m
Slovtory Provisions Regardlng Depreclation under the Companies Act, 1950
the effective life of amachine may be 30,000 hours. Ifthe cost of the machine is Rs.4.50 Sections 205, 349(4)(k), and 350 deal with depreciation. Sec. 349, which deals with
bourly depreciaion is dete mnination of net profits, says in computing the net profits of acompany in any financial year,
'4,50,000 Rs.15. depreciation to the extent specified in Sec. 350 should be deducted. If we look at Sec. 350, it states
30,000 bat the amount of depreciation to be deducted in pursuance of clause (k) of sub-section (4) of
The depreciation for aparticular year during which the machine runs for 2,500 hours will section 349 shall be the amount of depreciation on assets as shown by the books of the company at
2,500 x Rs. J5=Rs.37,500. the end of the financial year expiring at the commencement of this Act or immediately thereafter
amd at the end of each subsequent financial year at the rate specified in Schedule XIV.
10. Repairs Provision Method
However, if any asset is sold, discarded, demolished or destroyed for any reason before
The Institute of Cost and Management Accountants of England and Wales has defined depreciation of such asset has been provided for in ful, the excess, if any, of the written dowa
method as follows: "The method of providing for the aggregate of depreciation and maintesa value of such asset over its sale proceeds or, as the case may be, its scrap value, shallbe written off
cost by mears ofperiodic chargs each of which is aconstant proportion of the aggregaieo in the financial year in which the asset is sold, discarded, demolisbed or destroyed.
cost of the asset depreciated and the expected maintenance cost during its lifer. It means tat Sec. 205(1) of the Act states that no dividend shall be declared or paid by acompany for any
the cost of the asset (less its estimated scrap value), the amount expected to be spent ons
fnancial year except out of the profits of the company for that year arrived at after providing for
and maintenance throughout its ife should be added and the surm i be divided by its estimated i
CHANGE IN METHOD OF DEPRECLATION
depreciation in accordance with the provisions of sub-section (2) or out of the profits of the company
for any previous financial year or years arived at after pfoviding for depreciation in accordance
AS 6sates thatthe depreciation method
selected should betoapplied consistently from pe wilh those provisions and remaining undistributed or out of both or out of moneys provided by the
to period. Achange from one method of providing depreciation another should be madeou Cental Government for the payment of dividend in pursuance of a guarantee given by that
the adoption of the new method is required by statute or for compliance with an accountingstand government.
or ifit were considered that the change would result in a more appropriate preparation orpresentai
ofthe financial However if the company has not provided for depreciation for any previous financial yearor
statements of the
enterprise.in accordance
made, depreciation should be recalculated When such awith the innewthemethod
fdepreciabia Years which falls or fall afterthe commencement of the Companies (Amendment) Act, 1960(65 of
of the dateol
methodfromt
change 1960) it shal, before declaring or paying dividend for any financial year provide for such
asset coming into ust. The re-computatid
depreciation in accordance withdeficiency
he newormethod
surplusshould
arisingbe fron retrospective
adjusted lin the accountsintheye depreciation out of the profits of that financial year or qut of the profits of any oher previous
whichthe method of financial year or years.
depreciaion is changed. Incase delikio
in
depreciation in respect of past the change in the method rresultsin olp Furher Sec. 205 (2) states that depreciation shall be provided eiher
and loss. In case the years, the staatement
inthe mehod deficiency should be charged lin the be creditedw
of profit andchange
() to the extent specified in section 350; or
statement loss. Sucha change results in surplus, the surplus should
accountingpolig nrespect of each item of depreciable asset, for such an amount as isthearrived at by dividing
its
effect should be quantified and should be treated as a period in
disclosed. change in nety-five per cent of the original cost thereof to the company by specified
DISCLOSURES respect of such asset; or
Oany other basis approved by the Central Government which
has the eflect of writing
AS6 stales the to the company of cach
depreciation: following aboutthe disclosures to be madc in financial statementreg noy why of depreciation ninety-five per cent of the original cost
the Such depreciable asset on the expiry of the specified period; or
172 PRACTICAL AUDITING
(d) as regards any other depreciable asset for which no rate of depreciation has been hi
pEPRECIATON
173

made there under, on such basis as may be , He should see whether the officers of the business have
down by this Act or any rules
Central Govemment by any general
case. or approvedby a
order published in the Official Gazette by te provision for depreciation.
sincerely and honestly made
He should check whether the principles followed from year to
special order in any particular year for providing
provided for in the manner laid down in clause (b) depreciation are more or less the same.
Howeve, where depreciation is or clause
depreciable asset being sold,, discarded, demolished ( The auditor should examine as to whether the capital employed in the assets is being kept
(c), above then,inthe event of the dor
the written down value thereof at the end of the financial year in which the asset is
sold, didesscartroyadetd intact.
6 He should see whether the business traditions and rules have been fully considered.
demolished or destroyed, shall be wTitten off in accordance with the proviso to section 2t0
1. He should see whether the provisions of Companies Act as regards depreciation have
Besides Schedule XIV to Act gives the rate of depreciation for various assets. The been duly complied with.
given in Schedule XIV states the following points for our consideration: 8. He should see whether all the disclosures as regquired by AS 6 and the Companies Act
1. During any financial yea, where any addition has been made to any asset, or where am have been uly made in the financial statements.
asset has been sold, discarded, demolished or destroyed, the depreciation on such asea But if he finds that:
shall be calculated on a pro rata basis from the date of such addition or, as the caSe my
be, up to the date on which such asset has been sold, discarded, demolished or destrove 1. he depreciation has not been dealt with honestly by the management.
2. The folowing information should also be disclosed in the accounts: 2. competent persons have not been employed, and if employed they have not carefully
() depreciation methods used; and examined the issue.

() depreciation rates or the useful lives of the assets, if they are diferent from the principd 3. the provision for depreiation is not adequate.
rates specifed in the Schedule. 4. the principles of accountancy have not been followed by the mana gement in making the
3. The calculations of the extra depreciation for double shift working and for triple sht charge for depreciation.
working shall be made separately in the proportion which the number of days for wii S. the disclosures as required by AS 6 as well as the Companies Act have not been made.
the concem worked double shift or triple shift, as the case may be, bears to the nonm the auditor should draw the attention of the owners of the business towards the issue and
mumber of working days during the year. For this purpose. the normal number of workiy mention the fact in his report. If there is any change in the method of providing for depreciation,
days during the yezr shall be deemed to be.
(a) in the case of ascasonal Itmust be disclosed in the Profit and Loss Account along with its effect on the profit or loss for the
factory or concern, the number of days on which the factory year.
or cOncern actuzlly worked
duringthe or 180 days, whichever is greater;
(b) in eny other case, the nurnber of days on year whichthe factory ort concern actually worked
uring the year or 240 days, whichever is
4. The extra shift greater. REVIEW QUESTIONS
depreciation shall not be charged
plat which bas been specifically, excepted by inscription in of any item of machineryd Part - A
respect of the letters "N.ESD".
(meaning "No Extra Shift Depreciation") against it in sub-items above andalsoin resped
ofthe items of 1. Define the term depreciation.
cent applies. machinery and plant to which the general rate off depreciation of 13.91 e 2. What are depreciable assets?
5. In case of assets 3. What do you mean by useful life?
whose shallbeprovide
depreciation at the rateactual cost doesSnot
of hundred per cent.exceed
However, where therupees,
five thousand aggregateactualcosta 4. What are the different methods of depreciation?
5. What do you mean by straight hne method?
individual itens of plant and machinery costing Rs.S,000, or less constitutes noreth
10 per cent of thetotal actual cost of plant and rmachinery, ratessofdepreciationapplicabk O What do you mean by written down value method?
to such items shall be
the rates as specified in
Part -B
Item II of the 1. What is the need for depreciation?
AUDITOR'S DUTY Schedule.
The auditor's duty in Explain briefly the various methods of depreciation?
case of Whether method of depreciation can be changed frequently?
1 Itis the duty of he depreciation summarised below:
is 4. What are the
disclosures to be made in the financial
statements ofa company as per AS 67

depreciation auditor lo ensure that Part - C

is provided adequalely
Balat
Sheet. Ifthe charged isis properly disclosed indepreciatio n ithe
statutory provisions regrding the
2 auditor not
The auditor should see satisfied on the above, he
he Profit and Loss. Account and 1.
Define the term depreciation. Why it is needed? Discuss the
whether relevant prnciples of should Ireport thesame.follouedi provision of depreciation.
making provision for depreciation. have been Explain briefly the various methods of depreciation.
accountancy 3
scuss the nature, importance and need for providing depreciation.