DEPRECIATI
ON 1
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DEPRECIATI
ON
Concept
Objectives
Methods of Computation
Accounting
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DEPRECIATI
ON
According to Carter – “Depreciation is the gradual
and permanent decrease in the value of an asset
from any cause”
Causes includes: wear and tear, depletion,
obsolescence, efflux of time and accidents
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DEPRECIATI
of accounting periodsON
Fixed assets are Used to earn revenues for number
in future with one time cost
of acquisition.
Hence, it is necessary to treat a part of the cost of
acquisition of asset as an expense, in the accounting
periods in which the asset has been utilized.
The amount/ Part of fixed assets shown as expense
in this manner is known as depreciation.
Such amount of expense would reduce the book
value of the asset. CA Ravindra Pandey 4
DEPRECIATION: OBJECTIVES OF
To ascertain true results of operations
To present true and fair view of the financial position
To accumulate funds for the replacement of assets
To ascertain true cost of production
Correct assessment of the taxes.
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DEPRECIATION: COMPUTATION OF
The Basic factors for computation of
depreciation are:
i. Estimated Useful life of the asset
ii. Cost of the asset
iii. Residual value (Scrap Value or Salvage
Value) of the asset at the end of the
estimated life
iv. Method of depreciation
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DEPRECIATION:
METHODS OF COMPUTATION
Straight Line Method (SLM) or fixed installment
Written Down Value (WDV) or reducing/ diminishing value
Double declining method
Sum of years digit method
Machine hour method
Sinking Fund Method
Annuity Method
Production units method
The common methods followed are SLM and WDV (the
methods allowed by Accounting Standards).
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DEPRECIATION: COMPUTATION OF
USING SLM METHOD
Acquisition Cost 110,000
Less: Residual Value (10,000)
Depreciable Amount 100,000
Estimated Useful life of the asset 5 Years
Depreciation =
i.e., 100,000/5 = Rs. 20,000 per
Year.
Note: The Acquisition cost includes purchasing value, Installation cost,
erection cost, transportation cost, overhauling cost and import duty
levied on assets. CA Ravindra Pandey 8
DEPRECIATION: COMPUTATION OF
USING SLM METHOD
Equal amount of depreciation during the working
life of the assets.
It is easy to apply
It is also known as fixed installment method.
it assumes that the asset generates equal utility
during its lifetime.
if the asset is purchased in the middle of the year,
the proportionate amount of depreciation should be
considered. Similarly, if the assets is sold in the
middle of the year, same rule is followed.
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SLM: EXAMPLE
Q. J & CO. acquired a machine on July 1,
2015 at a cost of Rs. 14,00,000 and spent
Rs. 1,00,000 on its installation. The firm
writes off depreciation 10% per annum of
the original cost every year. the books are
closed on December 31 every year.
• Required: calculate depreciation amount and
show the machinery account.
Note: the cost of acquisition includes: purchase price and installation
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costs
SOLUTION:
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