depreciation meaning

8/8/2019 Depreciation Meaning

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Submitted by:

Abhilasha

Lovepreet

Parul

Sunira

Tarrunnum


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DEPRECIATION- MEANING

Depreciation is a permanent, continuing, and gradual

shrinkage in the book value of a fixed asset.

The Institute of Chartered Accountants of India

defines depreciation as, a measure of the wearing

out, consumption or other loss of a value of a

depreciable asset arising from use, affluxion 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.


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CAUSES OF DEPRECIATION

Physical depreciation

Time factor

Obsolescence

Accident


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METHODS OF DEPRECIATION

Fixed installment method

Written down vale method

Annuity method

Machine hour rate method


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FIXED INSTALLMENT METHOD

This method is also called as original cost orstraight line method.

Under this method, a fixed percentage of theoriginal value of the asset is written off everyyear so as to reduce the asset account to itsscrap value at the end of the estimated life of

the asset. Here, DEPRECIATION = HISTORICAL VALUE SCRAP VALUE

ESTIMATED LIFE OF AN ASSET


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MERITS

This method is simple to understand and easy

to apply.

This method is very suitable for those assets

which have a fixed life e.G. , Furniture, and

other assets of a small intrinsic value.


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DEMERITS

It becomes difficult to calculate the

depreciation on additions made during a year.

Under this method the depreciation chargeremain the same from year to year

irrespective of the use of the asset. Thus it

does not take into account the effective

utilisation of the asset.


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QUESTION

On1st January, 1999, machinery was purchased by xfor rs.50,000. On 1st July, 2000, additions weremade to the extent of rs.10,000. On 1st April,

2001, further additions were made to the extentof rs.6,400.

On 30th june,2002 machinery, the original value ofwhich was rs.8,000 on 1stjanuary,1999, was sold

for rs.6,000. Depreciation 10% on SLM method.Prepare machinery account for four years from

1999-2002 .


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MACHINERY ACCOUNT

DATE PARTICULARS AMOUNT DATE PARTICULARS AMOUNT

1999 1999

JAN.1 TO BANK 50,000 DEC.31 BY DEPRECIATION 5,000

DEC.31 BY BALANCE C/D 45,000

50,000 50,000

2000 2000

JAN.1 TO BALANCE B/D 45,000 DEC.31 BY DEPRECIATION

JULY 1 TO BANK 10,000 (5,000+ 500) 5,500

DEC.31 BY BALANCE C/D 49,50055,000 55,000

2001 2001

JAN.1 TO BALANCE B/D 49,500 DEC.31 BY DEPRECIATION


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TO BANK 6,400 (5,000+ 1,000+ 480) 6,480

BY BALANCE C/D 49,420

55,900 55,900

2002 2002

JAN.1 TO BALANCE B/D 49,420 JUNE 30 BY BANK 6,000

TO PROFIT AND

LOSS ACCOUNT

800 DEC.31 BY DEPRECIATION

(4,200+1,000+640+

400)

6,240

BYBALANCE C/D 37,980

50,220 50,220


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MACHINE HOUR RATE METHOD

This method is useful in case of machines.The life of machine is fixed in terms of hours.

Hourly rate of depreciation is worked out by

dividing the cost of machine by the totalnumber of hours for which the machine isexpected to be used. Depreciation to bewritten in a year will be ascertained by

multiplying the hourly rate of depreciation bythe number of hours that the machineactually runs in the year.


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QUESTION

A machine was acquired on 1st April, 2001 at a

cost of Rs.9000, the cost of installation being

Rs.1000. It is expected that its total life will be

20,000 hours. During 2001 it worked for 1,600

hours and during 2002 for 2,400 hours. Make

machinery account for 2001 and 2002.


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2001 2002

April 1 To bank (cost and

installation charges)

10,000 Mar.31 By depreciation 800

9,200Mar.31 By balance c/d

10,000 10,000

2002 2002

Arpil 1 To balance b/d 9,200 Mar.31 By depreciation 1,200

Mar.31 By balance c/d 8,000

9,200 9,200


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WRITTEN DOWN VALUE METHOD

Under this method, depreciation is calculated

at a certain percentage each year on the

balance of the asset which is brought forward

from the previous year.

The amount of depreciation charged in each

period is not fixed but it goes on decreasing

gradually as the beginning balance of asset ineach year will reduce.


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this method is justified in the cases where:

There is increase in repairs and maintenance

costs consequently decreasing efficiency andrevenue in every succeeding period.


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MERITS

Fresh calculations of depreciation are not

necessary as and when additions are made.

This method is recognised by the income tax

authorities in India.


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DEMERITS

As compared to straight line method, it is

difficult to determine the suitable rate of

depreciation.

The original cost of the asset is altogether lost

sight of in subsequently years and the asset

can never be reduced to zero.


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QUESTION

On 1st April, 1999, moon ltd. Purchased a plantfor rs.10,00,000. On 1st october, 1999 anadditional plant was purchased for rs.5,00,000.On 1st october,2000,the plant purchased on 1st

april,1999 was sold off for rs.4,00,000. On 1st

october,2001,a new plant was purchased forrs.12,00,000 and the plant purchased on1stoctober, 1999 was sold for rs.4,20,000 on the

same date.Depreciation 10% on wdv on 31st

march every year. Prepare plant account for threeyears ended 31st march, 2002.


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PLANT ACCOUNT

date particulars amount date particulars amount

1-4-99 To bank (p1) 10,00,000 31-3-00 By depreciation

1-10-99 To bank (p2) 5,00,000 P1- 1,00,000

P2- 25,000 1,25,000

By balance c/d 13,75,000

15,00,000 15,00,000

1-4-00 To balance b/d 13,75,000 1-10-00 By bank 4,00,000

By depreciation(p1) 45,000

By profit and lossaccount

4,55,000

31-3-01 By depreciation(p2) 47,500


13,75,000 13,75,000


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1-4-01 To balance b/d 4,27,500 1-10-01 By bank 4,20,000

1-10-01 To bank(p3) 12,00,000 By depreciation(p2) 21,375

To profit and loss

account

13,875 By depreciation(p3) 60,000


16,41,375 16,41,375


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ANNUITY METHOD

Under this method, amount spent on thepurchase of an asset is regarded as aninvestment which is assumed to earn interest

at a certain rate. Every year the asset account is debited with

the amount of interest and credited with theamount of depreciation. This interest iscalculated on the debit balance of the assetaccount at the beginning of the year.


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QUESTION

A firm purchases a 5 years lease for rs.40,000 on

1st January. It decides to write off depreciation

on the annuity method, presuming the rate of

interest to be 5% per annum. The annuity

tables show that a sum of Rs. 9,239 should be

written off every year. Show the lease account

for five years.


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Year 1 Year 1

Jan. 1 To bank 40,000 Dec. 31 By depreciation 9,239

To interest 2,000 Dec. 31 By balance c/d 32,761

42,000 42,000

Year 2 Year 2

Jan. 1 To balance b/d 32,761 Dec. 31 By depreciation 9,239

To interest 1,638 Dec. 31 By balance c/d 25,160

34,399 34,399

Year 3 year3


To interest 1,258 By balance c/d 17,179

26,418 26,418


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Year 4 Year 4

Jan. 1 To balance b/d 17,179 Dec.31 By depreciation 9,239

To interest 859 By balance c/d 8,799

18,038 18,038

Year 5 Year 5


To interest 440

9,239 9,239


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CHANGE OF METHOD

Sometimes the method is changed either from

original method to diminishing method or

vice- versa with effect from current year or

with retrospective effect. If the change is from

current year, then there will be no problem

but simply to change the method of

depreciation.


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QUESTION

Abc ltd. Purchased on 1stjanuary,1997

secondhand plant for rs.30,000 and

immediately spent rs.20,000 in overhauling it.

On 1stjuly,1997 additional machinery of a cost

of rs.25,000 was purchased. On 1stjuly 1999,

the plant purchased on 1stjanuary,1997

became obsolete and was sold forrs.10,000.on that date new machinery was purchased

for rs.60,000.


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Depreciation was provided for annually on

december 31 at 10% per annum on original

cost method. In 2000, however, the company

changed this method and adopted written

down value method at a rate of 15%.

Show the plant and machinery account for the

years 1997-2002.


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Plant and machinery account

date particulars amount date particulars amount

1997 1997

Jan.1 To bank 30,000 Dec.31 By depreciation

To bank 20,000 (5,000+1,250) 6,250

July 1 To bank 25,000 By balance c/d 68,750

75,000 75,000

1998 1998

Jan.1 To balance b/d 68,750 Dec.31 By depreciation 7,500

By balance c/d 61,25068,750 68,750

1999 1999

Jan.1 To balance b/d 61,250 July 1 By bank 10,000

July 1 To bank 60,000 By depreciation 2,500


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By profit and loss

account

27,500

Dec.31 By depreciation

(2,500+3,000) 5,500

By balance c/d 75,750

1,21,250 1,21,250

2000 2000

Jan.1 To balance b/d 75,750 dec.31 By depreciation

(15% of 75,750) 11,363


75,750 75,750

2001 2001

Jan.1 To balance b/d 64,387 Dec.31 By depreciation 9,658



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64,387 64,387

2002 2002

Jan 1 To balance b/d 54,729 Dec.31 By depreciation 8,209


54,729 54,729


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depreciation meaning

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