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    Depreciation

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    HarshitPal
    Depreciation refers to the reduction in the value of fixed assets over time due to wear and tear, damage, or obsolescence. It is calculated to allocate the cost of tangible and intangible assets over their useful life. The objectives of depreciation include calculating proper profits, showing the asset at its reasonable value, maintaining the original investment, and providing for asset replacement. Depreciation can be caused by internal factors like wear and tear or external factors like obsolescence. Common depreciation methods include the straight-line method, which charges the same depreciation amount each year, and the reducing balance method, which charges a fixed percentage on the diminishing balance each year.

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    Depreciation

    Uploaded by

    HarshitPal
    197 views13 pages
    Depreciation refers to the reduction in the value of fixed assets over time due to wear and tear, damage, or obsolescence. It is calculated to allocate the cost of tangible and intangible assets over their useful life. The objectives of depreciation include calculating proper profits, showing the asset at its reasonable value, maintaining the original investment, and providing for asset replacement. Depreciation can be caused by internal factors like wear and tear or external factors like obsolescence. Common depreciation methods include the straight-line method, which charges the same depreciation amount each year, and the reducing balance method, which charges a fixed percentage on the diminishing balance each year.

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    Depreciation refers to the reduction in the value of fixed assets over time due to wear and tear, damage, or obsolescence. It is calculated to allocate the cost of tangible and intangible assets over their useful life. The objectives of depreciation include calculating proper profits, showing the asset at its reasonable value, maintaining the original investment, and providing for asset replacement. Depreciation can be caused by internal factors like wear and tear or external factors like obsolescence. Common depreciation methods include the straight-line method, which charges the same depreciation amount each year, and the reducing balance method, which charges a fixed percentage on the diminishing balance each year.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    197 views13 pages

    Depreciation

    Uploaded by

    HarshitPal
    Depreciation refers to the reduction in the value of fixed assets over time due to wear and tear, damage, or obsolescence. It is calculated to allocate the cost of tangible and intangible assets over their useful life. The objectives of depreciation include calculating proper profits, showing the asset at its reasonable value, maintaining the original investment, and providing for asset replacement. Depreciation can be caused by internal factors like wear and tear or external factors like obsolescence. Common depreciation methods include the straight-line method, which charges the same depreciation amount each year, and the reducing balance method, which charges a fixed percentage on the diminishing balance each year.

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    © All Rights Reserved
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    Download as pptx, pdf, or txt
    of 13
    At a glance
    Powered by AI
    The key takeaways are the concepts, objectives, causes and methods of depreciation.

    The objectives of depreciation are to calculate proper profits, show the asset at its reasonable value, maintain the original monetary investment of the asset intact, and provide for replacement of an asset.

    The internal causes of depreciation are wear and tear, disuse, maintenance, change in production, restriction of production, reduced demand, technical progress and depletion. The external cause is obsolescence.

    DEPRECIATION

    TOPICS
    CONCEPT
    OBJECTIVES

    CAUSES
    DEPRECIATION

    METHODS

    CONCEPT
    Depreciation

    is the cost of lost usefulness


    or cost of diminution of service yield from
    a use of fixed assets.

    permanent fall in the value of fixed


    assets arising through wear and tear from
    the use of those assets in business.

    Definition
    Depreciation

    is a measure of the wearing out,


    consumption or other loss of value of
    depreciation asset arising from use, efflux ion of
    time or obsolescence through technology and
    market changes. Depreciation is allocated so as
    to charge a fair proportion of the depreciable
    amount in each accounting period during the
    expected useful life of the asset. Depreciation
    includes amortization of assets whose useful life
    is predetermined.

    Objectives
    To
    To

    calculate proper profits.


    show the asset at its reasonable value
    To maintain the original monetary
    investment of the asset intact.
    To provide for replacement of an asset.
    Depreciation is permitted to be deducted
    from profits for tax purposes.

    Causes of
    Depreciation
    Internal

    causes: wear and tear, disuse,


    maintenance, change in production,
    restriction of production, reduced demand,
    technical progress & depletion.

    External

    causes: obsolescence

    What can be depreciated


    Depreciation

    can be done on assets if it meets the


    following criteria
    It is used in business or held for the production of
    income.
    It must be expected to last for more than one year.
    It is property that wears out, decays, get used up,
    becomes obsolete, or looses value from natural
    causes.
    Depreciable property can be either tangible or
    intangible

    Factors in measurement of
    depreciation
    Total

    cost of asset
    Estimated useful service life or economic
    life
    The estimated turn-in (residual) value.

    Methods of Depreciation
    1.

    Straight Line Method

    Straight line method of depreciation is based on the cost


    of an asset that is then depreciated by the same amount,
    over the estimated useful life of the asset.
    Example: ABC Ltd bought a machine at a cost of Rs 40,000.
    The machine has an expected useful life of 5 years and at the
    end it has no salvage value. Calculate depreciation.
    Cost

    Annual Depreciation

    Net Book Value

    End of 1st year

    8,000

    32,000

    End of 2nd year

    8,000

    24,000

    End of 3rd year

    8,000

    16,000

    End of 4th year

    8,000

    8,000

    End of 5th year

    8,000

    Beg. Of Year

    40,000

    Question: Calculate the depreciation on a machine which costs


    Rs 80,000, having expected life of 5 years. Salvage value Rs

    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

    r =R/C * 100;
    r = depreciation rate
    R = Amount of depreciation, C = Acquisition cost

    Straight line method


    Advantages of Straight line method:
    Simple, easy to understand and to apply
    It provides uniform charge every year
    Its calculated on original cost over the life time
    Disadvantages:
    Depreciation is not related to the usage factor
    It ignores the fact that in the later years of the life of
    the asset, efficiency of the asset declines.

    Methods of Depreciation
    2. Reducing Balance Method

    Depreciation is calculated on a fixed percentage on the


    Diminishing Balance of the Asset (Net Book Value). This
    results in a higher depreciation charge in the earlier years
    of assets estimated useful life.
    Example: A machine costs Rs 50,000 is depreciated at
    15% Calculate depreciation
    using
    ReducingNet
    balance
    Cost
    Annual
    Depreciation
    Book Value
    method.
    Beg. Of Year

    50,000

    50,000

    End of 1st year

    50,000 * 15% =
    7,500

    42,500

    End of 2nd year

    42,500 * 15% =
    6375

    36,125

    End of 3rd year

    36,125 * 15% =
    5,419

    30,706

    End of 4th year

    30,706 * 15% =
    4,606

    26,100

    End of 5th year

    26,100 * 15% =
    3,915

    22,185

    Reducing Balance Method


    Advantages
    1. Appropriate for assets which lose value quickly in
    early year.
    2. Appropriate for assets which become obsolete

    Disadvantages
    1. Asset is never completely written of

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