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    Depreciation

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    raj10420
    Depreciation is the allocation of the cost of a fixed asset over its useful life. It is an expense charged against earnings each period to match the cost of the asset with the benefits derived from its use. Under the straight line method, annual depreciation is calculated by subtracting the scrap value from the original cost and dividing the difference by the number of years of the asset's useful life. Depreciation begins when the asset is placed in service and ends when the asset is fully depreciated or retired from service. There are different methods for calculating depreciation including straight line and reducing balance methods. The reducing balance method charges higher depreciation in initial years by applying the depreciation rate on

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    Depreciation

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    raj10420
    121 views27 pages
    Depreciation is the allocation of the cost of a fixed asset over its useful life. It is an expense charged against earnings each period to match the cost of the asset with the benefits derived from its use. Under the straight line method, annual depreciation is calculated by subtracting the scrap value from the original cost and dividing the difference by the number of years of the asset's useful life. Depreciation begins when the asset is placed in service and ends when the asset is fully depreciated or retired from service. There are different methods for calculating depreciation including straight line and reducing balance methods. The reducing balance method charges higher depreciation in initial years by applying the depreciation rate on

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    31467642 Depreciation

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    Depreciation is the allocation of the cost of a fixed asset over its useful life. It is an expense charged against earnings each period to match the cost of the asset with the benefits derived from its use. Under the straight line method, annual depreciation is calculated by subtracting the scrap value from the original cost and dividing the difference by the number of years of the asset's useful life. Depreciation begins when the asset is placed in service and ends when the asset is fully depreciated or retired from service. There are different methods for calculating depreciation including straight line and reducing balance methods. The reducing balance method charges higher depreciation in initial years by applying the depreciation rate on

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    121 views27 pages

    Depreciation

    Uploaded by

    raj10420
    Depreciation is the allocation of the cost of a fixed asset over its useful life. It is an expense charged against earnings each period to match the cost of the asset with the benefits derived from its use. Under the straight line method, annual depreciation is calculated by subtracting the scrap value from the original cost and dividing the difference by the number of years of the asset's useful life. Depreciation begins when the asset is placed in service and ends when the asset is fully depreciated or retired from service. There are different methods for calculating depreciation including straight line and reducing balance methods. The reducing balance method charges higher depreciation in initial years by applying the depreciation rate on

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    of 27

    MANISH BHANDARI

    Depreciation is not the fall of value of assets over time.

    Definition of Depreciation
    Fixed assets provide usefulness over several periods in a company.

    The allocation of the cost of an asset over its estimated useful life.  An expense in the given period.

    When a business purchases a fixed asset, it is actually purchasing a bundle of service benefits that will be provided over the length of the asset s useful life. Thus, only a portion of the total cost is charged as an expense in the current year.

    The amount of service benefits used up during the year is DEPRECIATION. In compliance with the matching principle, the cost of using the fixed asset in a particular year (depreciation) should be charged against the revenue earned in that year to get the true profit for that year.

    Definition
     The allowance for wear and tear on equipment and

    machinery  Amount of decreasing value in a capital asset allowed to be deducted from a business tax return  Cost Recovery

    You can depreciate property only if it meets the following requirements:


     It is used in business or held for the production of income.  It must be expected to last for more than one year. In

    other words, it must have a useful life that extends substantially beyond the year it was placed in service.  It is property that wears out, decays, gets used up, becomes obsolete, or looses value from natural causes.

    Depreciable property can be either tangible or intangible

    Purchased property you can see or touch


         

    Livestock (purchased) Machinery Buildings and improvements, fences Dams, ponds, or terraces Irrigation systems and water wells Partial business use
    You can claim depreciation on the part of a vehicle used in the business (ex - 1/2 business value of a truck)

    Property placed into service and disposed of in the

    same year. Land (land can never be depreciated) Inventory


    You cannot depreciate property held for resale in the

    normal course of business


    Leased property The value of the lease is already showing up as a rental

    expense
    Raised Market Livestock (Because there is no cost to

    recover)

    Begins
     When you place the

    Ends
     When the cost of the item has

    property in service .  When it is ready and available for a specific use in the business

    been recovered or when it is retired from service, whichever happens first

    Example
     When it is sold or is not longer

    Example
     When it was bought for the

    useable

    business

    Reduction in value Charged on book value Permanent decrease Charged on fixed assets only Nature Based on forecast Fall in quality and productivity

    New Accounting Terms for fixed assets


    1. Original Cost
    Purchase price of fixed asset

    3. Useful Life
    The number of years the assets is expected to be used

    4. Annual Depreciation
    Each year depreciation

    2. Scrap Value
    The cash estimated to be received from the sale of the asset at the end of its useful life

    Allocation of the cost of a fixed asset over its estimated life. Accounted as an expense in the given period.
    Purchase price of fixed asset

    Physical deterioration caused by wear and tear

    Obsolescence from rapid changes in technology

    Passage of time (e.g. patents)

    Definition

    Reasons

    Depletion of fixed assets

    Depreciation Original cost Useful Life The number of years the asset is expected to be used. Straight Line Method Annual Depreciation =
    Original Cost-Scrap value

    Useful Life (in years)

    OR Annual depreciation = Rate of depreciation X Original Cost

    METHODS OF DEPRICIATION

     Also

    known as diminishing or reducing balance method. Depreciation is charged at fixed rate on the reducing balance  Reducing balance = original cost of the asset depreciation  It is calculated every year.  The depreciation is more in the beginning and the repair charges are much less.  The written down value method (which is also abbreviated as WDV) is generally used to depreciate fixed asset.

    1. 2. 3. 4. 5.

    Easy calculation Equal charge against income No undue pressure in later years Balance of asset is never written off to zero Approval method by income tax authority

    1. 2. 3. 4.

    Asset cannot be completely written off Omission of interest factor. Difficulty in determining the rate of depreciation Knowledge of original cost and upto-date depreciation not possible

    Amount of depreciation Basis of calculating depreciation Zero level Combined effect of depreciation and repairs on P&L a/c Rate of depreciation Approval of income tax Sustainability

    A machinery was purchased on 1st Jan 2005 for Rs 10000 . depreciation has been written off the machinery account on reducing balance method for last 3 years @ 10%. P.a. Prepare machinery account and depreciation account.

    WRITTEN DOWN VALUE METHOD MACHINERY ACCOUNT


    Dr. Date 2005 Jan 1 Particulars To Bank A/c J. F Amount 10000 Date 2005 Dec 31 Particular By Depreciation A/c By Balance c/d Cr J. Amount F 1000 9000 10000 900 8100 9000 810 7290 8100

    10000 2006 Jan 1 To balance b/d 9000 2006 Dec 31 By Depreciation A/c By Balance c/d

    9000 2007 Jan 1 To balance b/d 8100 2007 Dec 31 By Depreciation a/c By Balance c/d

    8100 2008 Jan 1

    To balance b/d

    7290

    DEPRECIATION ACCOUNT
    Dr. Date 2005 Dec 31 Particulars To Machinery A/c J. F Amount Date 1000 2005 Dec 31 Particular By profit and loss A/c Cr J. Amount F 1000

    1000 2006 Dec 31 To Machinery A/c 900 2006 Dec 31 By profit and loss A/c

    1000 900

    900 2007 Dec 31 To Machinery A/c 810 2007 Dec 31 By profit and loss a/c

    900 810

    810

    810

    Ques- A firm purchased a machinery for Rs. 15,000 on 1st june,2009 . On 1st jan,2010 further machinery was purchased for Rs.10,000.On 31st march, 2011 the machinery purchased on 1st June was became obsolete, was auctioned for Rs.6,000and new machinery was purchased for Rs.15,000. Write up the machinery account for first three years if depreciation is provided for 10% p.a on Reducing Balance Method.

    MACHINERY ACCOUNT Date


    2009 Jun 1 Particulars To Cash A/C (a) Amt. Date 2009 15,000 Dec 31 Dec 31 15,000 2010 Jan.1 Jan 1 2010 Dec 31 To Bal b/d (a) To Cash a/c (b) 14,250 10,000 Dec 31
    24,250

    Particulars By Depreciation a/c (a) By Bal c/d (a)

    Amt.
    750 14,250 15,000

    By Depreciation a/c (a)1,425 (b)1,000 (b)1,000 By Bal c/d (a)12,825 (b)9,000 (b)9,000

    2,425

    21,825 24,250

    Date Particulars
    2011 Jan 1

    Amt.

    Date

    Particulars

    Amt.

    To Bal b/d (a)12,825 (b)9,000 (b)9,000

    Mar 31 To Cash a/c

    (c)

    2011 Mar 31 By Cash a/c (a) Mar 31 By Profit & loss a/c (loss on sale ) 21,825 Mar 31 By Depreciation a/c (a) 15,000 Dec 31 By Depreciation a/c (b) 900 (c)1,125 (c)1,125 Dec 31 By Bal c/d (b) 8100 (c) 13875 36,825

    6,000 6,504 321

    2,025

    21975 36,825

    Working Note: Dec.31, 2009- Depreciation (a) =Rs.15000*10/100 =Rs.1500*6/12 =Rs.750 Dec.31, 2010- Depreciation (a)= Rs.14,250*10/100 =Rs.1,425 (b)= Rs.10,000*10/100 =Rs.1,000 Total Depreciation= 1,000+1,425 =2,425

    Mar 31, 2011- Depreciation (a)=12,825*10/100 = 1283*3/12 = 321 Mar 31,2011 Loss from sale of machinery (a)= 12,825- (6,000 + 321) =6,504 Dec 31,2011 Depreciation (b)=9000*10/100 =900 (c)=15,000*10/100 =1,500*9/12 =1,125 Total Depreciation= 900+1,125

    3000

    Deprecation Cost ($)

    2500

    2000

    1500

    1000

    500

    0 0 1

    Asset life (years)

    One common depreciation method is the Straight Line Method, where


    Annual Depreciation = Original Cost Scrap Value Useful Life (in years)

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