Depreciation 15 would enable students to understand: ors of Depreciation of Depreciation eerste vere on, Amortisation and Depletion ses OF easons of Depreciation or Need for Providing Depreciation ‘or Basis of Providing Depreciation i (Accounting) Depreciation: rads of Recording ( ation: Charging to Asset Mer on/Accumulated Depreciation Account 10 Ast kei Charging Depreciation: Straight Line Method it wethods 0 precia ‘od and Written Down Value Method ference between Straight Line Method and Written Down Value Method of Depreciation mn pisposal Account —~<_MEANING OF DEPRECIATION > ---- Iypreiation is reduction in book value of fixed asset due to wear and tear or efflux of fime or due to obsolescence or accident. Fad ksets are purchased in the business for long-term use. During the course of their use, every year, a part sine cost of these fixed assets expires, ie, consumed or utilised or lost due to wear and tear, passage of time. obsolescence. The measure of this expired cost is termed as ‘depreciation’ in accounting. s ‘Depreciation may be defined as a measure of the exhaustion of the effective life of an asset from any cause during a given period.” —Spicer and Pegler “Depreciation is the gradual and permanent decrease in the value of an asset from any cause.” —R.N. Carter Depreciation means allocation of depreciable cost (Cost less Scrap Value) of the fixed aset in a systematic manner over its estimated useful life. Depreciation is an expense for an entity and is transferred to the debit of Profit & lass Account: {) to determine correct profit or loss for the year; and (i) to show true and fair view of the financial position (Balance Sheet) b ‘ixed assets at their fair value. y showingnall tangible fix, land has ing, ed a, inite ful life in a system, i pt freehold land), : eee se the book value is rey hen an asset becomes obsolete due to product of better qui a better machine comes in the market, old machines may have to jough they are capable of being used because use of new machine r ost of production. ical deterioration oy ixed assets such Wasting Assets is tay be permanent but is not continuing and gradual. ¢ first two factors are considered relevant for depreciation. Causes ij) are considered only when they occur, which is occasional and do n Accounting oncept of depreciation means allocation of cost of fixed asset over its ‘in a systematic manner. According to this concept, in an accounting sof the asset is charged as an expense each year over the estimated d asset. Depreciation is like any other expense and thus, is a charge arged every vear and transferred to the debit of Profit & Loss Account ermine correct profit or los: assets useful life of w tion is not charged on ore, is a charge against revenue. .ed or loss incurred for the and Fair View of the Financial Position ww of the financial position of the entity. assets being stated at a higher value. As salance Sheet) would not present a true and. Position Statement (Bi incial position ofae 3. To Determine the Correct Cost of Production Depreciation is an element of cost for calculating the cost of production taken into account, cost of the production will be Jower by the amount of As a result, sale price of the product may not be correct. 4. To Provide Funds for Replacement Depreciation is a non-cash expense and when it is charged the amount of 4 is retained in the business and that can be used for the replacement of after the expiry of their estimated useful life. 5. To Comply with Legal Provisions It is necessary to charge depreciation to comply with the provisions of the © Act and the Income Tax Act. “«:~< FACTORS OR BASIS OF PROVIDING DEPRECIATION ~ Factors involved for calculating the amount of depreciation are: 1. Original (Historical) Cost of the Asset Cost includes price paid to the vendor, commission or brokerage on purchase, and installation charges. Thus, Cost of Asset = Purchase Price + Freight + Installation Cost For example, If a machinery is purchased for % 7,50,000 and % 20,000 are in: its freight and % 30,000 on installation, the total cost of machinery will be 7 & (e., = 7,50,000 + % 20,000 + % 30,000). Important Points about Cost of the Asset: « GST (CGST and SGST or IGST) Paid on purchase of asset is not a cost of because GST Paid is set off against GST(CGST and SGST or IGST) Collected. Asset Account is debited without taking GST Paid. In effect, Depreciation on the amount debited to Asset Account. Cost of the Asset does not include interest paid or payable on amount bor finance the purchase of an asset. ° Expenses of capital nature, like extension of an existing asset or repairs i large amount and that increases the life of the asset or improves the quality product are of capital nature and added to the cost of an asset. © If an old asset is purchased, expenses incurred to make it ready for use included in the total cost of the asset. 2. Estimated Residual or Scrap Value Residual value is an estimated realisable value of the asset at the end o: useful life. Difference between the cost and residual or scrap value is the © is written off over the estimated useful life of the asset. Amount to be written off = Cost of Asset — Residual or Scrap Valuewhich Depreciation is Charged nis charged for the period the asset is used in the business. For example, asset sed on 1st October, depreciation will be charged for six months (1st October to ). If an asset is sold, depreciation will be charged from the beginning up to the date of sale. This principle does not apply if the words is not given along with the depreciation rate. Down Value: It is that part of the cost of fixed asset which has not yet been written value of an assets its cost when itis acquired less depreciation written off. Therefore, t = Original cost of Asset - Total depreciation till date. ation is given with the words per annum (e.g., 15% p.a.) and quisition is given — Depreciation be charged only for the period for which the asset is held. quisition is not given — Depreciation be charged for the full year and a note explaining it be given. tion is given without — Depreciation be charged for the full year. uM, €.9., 15%.