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Depreciation made easy !

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About Depreciation accounting and the basics of Depreciation.

About Depreciation accounting and the basics of Depreciation.

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  • 1. Depreciation Accounting
  • 2. Definition According to accounting standard (AS 6) “Depreciation is a measure of the wearing out , consumption or other loss of value of a depreciable asset arising from use effluxion of time or obsolescence through technology and market changes”
  • 3. Definition analysis Allocation of depreciable amount of a fixed asset over its estimated useful life Depreciation is a non-cash expense and is charged to Profit & Loss a/c each year Depreciation is based on cost of asset
  • 4. CAUSES  By contrast  By expiry of time  By obsolescene  By depletion  Permanent fall in price  By abnormal factors NEED  For determination of net profit or net loss.  For showing asset at fair and true value in the balance sheet.  Provision of funds for replacement of assets.  Ascertaining accurate cost of production.  Distribution of dividend out of profit only. FACTORS  Total cost of the asset.  Estimated useful life of the asset.  Estimated scrap value.  Chances to obsolescene.  Addition to assets.  Legal provision.
  • 5. Causes INTERNAL CAUSES:  Wear and tear  Depletion EXTERNAL CAUSES:  ObsolescenceObsolescence  Passage of timePassage of time ACCIDENT PERMANENT FALL IN PRIC
  • 6. Needs Determination of net profit or net loss. Showing assets at fair and true value in the balance sheet. Provision of funds for replacement of assets. Ascertaining accurate cost of production. Distribution of dividend out of profit only. Avoiding over payment of income tax.
  • 7. Factors Determining Depreciation Original cost of fixed asset i.e., purchase price plus freight and installation expenses. Estimated amount of expenditure on repairs during the useful life. Estimated useful life of asset after which it will be discarded. Estimated residual or scrap value. Possibility of obsolescence. Interest on investment-the amount invested on purchase of asset, if it had been invested in some other investment what interest would have been earned.
  • 8. Assessment of Depreciation
  • 9. Methods of Depreciation 1) STRAIGHT LINE METHOD  Amount of depreciation is fixed.  Useful to assets whose service remain uniform throughout the year. For eg: Furniture & fixtures 2) WRITTEN DOWN VALUE METHOD  Rate of depreciation is fixed. 3) ANNUITY METHOD  Depreciation is calculated from annuity table. 4) SINKING FUND METHOD  The amount of depreciation created is invested outside. 5) INSURANCE POLICY METHOD  Amount of depreciation of each year is paid as an insurance premium.
  • 10. 6) ANNUAL EVALUATION METHOD 7) KILOMETRE METHOD  Depreciation calculated on the distance run by the transportation means. 8) LABOUR HOUR RATE METHOD  Depreciation is calculated on the basis of labour hour worked. 9) GLOBAL METHOD  Depreciation is calculated on the sum of all the assets. 10) PRODUCTION UNIT METHOD  Mostly used in mines to calculate the depreciation on production. 11) STATUATORY METHOD  Depreciation value/rate is fixed by this method.
  • 11. Change In Method Of Depreciation • Required by statute or law • Required for compliance with an accounting standards • Result in more appropriate preparation and presentation of financial statement
  • 12. Disclosure in the F.S a) The depreciation methods used b) The total depreciation for the period for each class of assets c) The gross amount of class of assets and related accumulated depreciation d) Other accounting policies ( relevant to depreciation) e) The depreciation rates or useful lives of assets if they are different from principal rates f) A change in the method of depreciation is considered as a change in accounting policy
  • 13. Disposal of Depreciation Assets Important clarification u/s 350 of Companies Act 1956  Depreciation should be charged even if assets remain idle  Depreciation should be provided on immovable assets  The number of shifts (double or multiple) for which the assets has been used should be considered for depreciation  For depreciation charge , Written Down Value(WDV)-is suggested though straight
  • 14. CONCLUSION This Standard applies to all depreciable assets, except the following items to which special considerations apply:— (i) forests, plantations and similar regenerative natural resources; (ii) wasting assets including expenditure on the exploration for and extraction of minerals, oils, natural gas and similar non regenerative resources. (iii) expenditure on research and development; (iv) goodwill and other intangible assets; (v) live stock. This standard also does not apply to land unless it has a limited useful life for the enterprise.
  • 15. • Depreciation has been provided under written down value method at the rates prescribed under Schedule XIV of the Companies Act, 1956. United Breweries ~ Depreciation
  • 16. Thank You !