Depreciation is an accounting and financial concept that refers to the decrease in
the value or worth of an asset over time. This decrease in value is typically due
to factors such as wear and tear, uselessness, or the passage of time.
Depreciation is an essential accounting practice for accurately reflecting the cost
of using an asset over its useful life and for matching expenses with revenue in
financial statements.
Straight-Line Depreciation:
This is the simplest and most widely used method. It allocates an equal amount
of depreciation expense each year over the asset's useful life. The formula is:
Depreciation Expense = (Cost - Salvage Value) / Useful Life
Cost: The initial cost of the asset.
Salvage Value: The estimated value of the asset at the end of its useful life.
Useful Life: The expected duration over which the asset will be used.
Diminishing Balance Method:
The diminishing balance method, also known as the declining balance method,
is an accelerated depreciation technique used in accounting to allocate the cost
of an asset over its useful life. Unlike the straight-line method, which allocates
an equal amount of depreciation expense each year, the diminishing balance
method front-loads depreciation expenses, meaning more depreciation is
recognized in the earlier years of an asset's life.
Illustration 1
M/s Singhania and Bros. purchased a plant for ` 5,00,000 on April 01, 2017, and
spent ` 50,000 for its installation. The salvage value of the plant after its useful
life of 10 years is estimated to be ` 10,000. Record journal entries for the year
2016-17 given that the depreciation is charged using straight line method if : (i)
The books of account close on March 31 every year; and (ii) The firm charges
depreciation to the asset account.
Illustration 2
M/s Mehra and Sons acquired a machine for ` 1,80,000 on October
01, 2016, and spent ` 20,000 for its installation. The firm writes-off
depreciation at the rate of 10% on original cost every year. Record
necessary journal entries for the year 2016-2017, 2017-18 and draw
up Machine Account and Depreciation Account for first three years
given that: (i) The book of accounts closes on March 31 every year;
and (ii) The firm charges depreciation to asset account.
Illustration 3
M/s. Dalmia Textile Mills purchased machinery on April 01,
2016 for ` 2,00,000 on credit from M/s Ahuja and sons and
spent ` 10,000 for its installation. Depreciation is Rationalised
2023-24 Depreciation, Provisions and Reserves 247 provided
@10% p.a. on written down value basis. Prepare Machinery
Account for the first three years. Books are closed on March
31, every year.
Problem:-
On 1st January, 2010 a company purchased a machine for
Rs 3,90,000 and spent Rs 10,000 on its installation. It
decided to provide depreciation @ 10% per annum, using
written down value method. On 31st December, 2011 the
machine was dismantled at a cost of Rs 5,000 and then
sold for Rs 1,00,000.
On 31st Dec, 2011 the company acquired and put into
operation a new machine at a total cost of Rs 7,60,000.
Depreciation was provided on the new machine on the
same basis as had been used in the case of the earlier
machine. The company closes its books of account every
year on 31st Dec. Give Journal entries for 2011
Illustration 9
On Jan 01, 2012 Jain & Sons purchased a second hand
plant costing ` 2,00,000 and spent ` 10,000 on its
renovating. It also spent ` 5,000 on transportation and
installation of the plant. It was decided to provide for
depreciation @ of 20% on written down value. The plant
was destroyed by fire on July 31, 2015 and an insurance
claim of ` 50,000 was admitted by the insurance company.
Prepare plant account, accumulated depreciation account
and plant disposal account assuming that the company
closes its books on December 31, every year.
2,15,000
Dep 43000
1,72,000
Dep 34400
1,37,600
Dep 27520
1,10,080
Dep 12843
97,237
Insu claim 50,000
Loss 47,237
