B.Com (C .
A) 1st year II Sem
2A- FINANCIAL ACCOUNTING
T.Deva Prasad M B A ,M.Com,
SAP FICO , Finance trainer
GAYATRI Degree & PG College
Unit-I: DEPRECIATION
Meaning and causes of deprecation-
Methods of Depreciation – Straight line
method – Diminishing balancing method –
Annuity method and Depletion method –
Problems.
vikas vadakara
Valuation of assets
vikas vadakara
Intangible assets
vikas vadakara
Tangible assets
vikas vadakara
Fixed assets =DEPRECIATION
vikas vadakara
CONCEPT
A permanent fall in the value of fixed
assets arising through wear and tear from
the use of those assets in business.
vikas vadakara
depreciation
Definition
as “The permanent and continuing
diminution in the quality, quantity or value of an
asset”.
Depreciation is a permanent, continuing and gradual
shrinkage in the book value of a fixed asset.
Depreciation is the measure of the wearing out,
consumption or other loss of value of a depreciable
asset arising from use, efflux ion of time or
obsolescence through technology and market
changes
Institute of Chartered Accountant of India
vikas vadakara
Depletion
Amortization
Obsolescence
vikas vadakara
objectives
To calculate proper profits.
To show the asset at its reasonable value
To provide for replacement of an asset.
Depreciation is permitted to be deducted
from profits for tax purposes.
vikas vadakara
Causes of Depreciation
Internal causes:
wear and tear, natural resources usage,
inefficiency , maintenance, change in
production, restriction of production,
reduced demand, technical progress
External causes:
obsolescence and effluxion of time
vikas vadakara
Factors in measurement of depreciation
Total cost of asset
Estimated useful servicelife
The estimated scrape value.
vikas vadakara
Journal entries
Date Particulars L Deb Cre
f it dit
Purchases Assets A/c dr
date to bank A/c
Year Depreciation A/c dr
ending to Assets A/c
date
Year Profit & Loss A/c dr
ending to Depreciation A/c
date
Saledate Bank A/c dr
to Assets A/c
Profit Assets A/c dr
to Profit & Loss A/c
Loss Profit & Loss A/c dr
Assets A/c vikas vadakara
Methods of recording depreciation
Straight line method or fixed installment
Declining charge method or diminishing or
WDV
Sum of years digit method
revaluation method
Annuity method
Depreciation fund method
Machine hour method/ Production unit
method
vikas vadakara
Straight line method or fixed installment
Under this method, the same amount of
depreciation is charged every year
throughout the life of the asset.
The formula = Total cost of acquisition - residual value
or
scrap value
Estimated life use full life of assets
r =R/C * 100;
r = depreciation rate
R = Amount of depreciation, C = Acquisition cost
vikas vadakara
Declining charge method or diminishing
value method
Under this method depreciation is charged
at fixed rate on the reducing balance every
year.
Formula r = 1-n √ S/C
S= Residual value
C = Cost of the asset
vikas vadakara
Annuity Method
This method is most suitable for a firm where
capital is invested in the least hold
properties.
Under this method, while calculating the
amount of depreciation, a fixed amount of
depreciation is charged for every year of the
estimated useful life of the asset in such a
way that at a fixed rate of interest is
calculated on the same amount had been
invested in some other form of capital
investment.
vikas vadakara
Sinking Fund Method
In other words, the amount of
depreciation charged is debited to
depreciation account and an equal amount
is credited to Sinking Fund Account. At the
estimated expiry useful life of the asset,
the amount of depreciation each year is
invested in easily realizable securities
which can be readily available for the
replacement of the asset.
vikas vadakara
Revaluation Method
This method is specially for of livestock,
loose tools, patents etc.
The calculation of depreciation of these
assets is valued at the end of the
accounting year by comparing the opening
value of the asset of the additional if any,
the difference is treated as depreciation/
Appraisal Method.
vikas vadakara
Insurance Policy Method
Under this method an asset to be replaced
by taking required amount of insurance
policy from an Insurance Company.
A fixed premium is paid which is equal to
the amount of depreciation for every year.
At the end of the agreed sum, i.e., on the
maturity of the policy, the amount will be
used for replacing the existing assets
vikas vadakara
Depletion Method
Specially for natural resources such as
mines, quarries, oil and gas etc. from
which certain quantity of the resources
can be obtained on the basis of the
availability of minerals.
The quantity of output exhaust to reaches
a stage of depletion.
The rate of depreciation is determined on
the basis of the quantity obtained for
every year
vikas vadakara
Sum of Years Digits (SYD) Method
Under this method the amount of
depreciation to be charged to the Profit
and Loss Account goes on decreasing
every year throughout the life of the
asset.
vikas vadakara
Machine Hour Rate
Method
This method is similar to the Depletion
Method but instead of taking estimated
available quantities in advance, the
working life of the machine is estimated in
terms of hours.
vikas vadakara
