As 6

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Accounting Standard 6

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As 6

  1. 1. DEPRECIATION<br />WEAR AND TEAR<br />
  2. 2.
  3. 3. Accounting standards<br /><ul><li> The set of rules ,a sort of law or guide to action
  4. 4. Relate to codification of generally accepted accounting principles(GAAP)
  5. 5. In 1973 , an international body,namely,”the international accounting
  6. 6. standards committee,orIASC”with 16 accounting professional bodies from
  7. 7. 9 nations
  8. 8. The indian counterpart of the IASC ,namely the institute of chartered
  9. 9. accountants of India( ICAI) has also formulated and issued,with the
  10. 10. international accounting standards, the following 28 accounting standards
  11. 11. referred to as Indian accounting standards or AS
  12. 12. This standard was first issued in november 1985 and made mandatory from
  13. 13. 1.4 1995
  14. 14. The accounting standard(AS)6,’depreciation accounting’,issued by the
  15. 15. ICAI</li></li></ul><li>AS-6:DEPRECIATION ACCOUNTING<br />According to accounting standard (AS 6)<br /> “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”<br />
  16. 16. DEPRECIABLE ASSET<br /> USEFUL LIFE<br /><ul><li>Are expected to be used during more than one accounting period
  17. 17. Have a limited useful life
  18. 18. Held by an enterprise for use in the production or supply of goods and services
  19. 19. The period over which a depreciable asset is expected to be used by the enterprise
  20. 20. The number of production or similar units expected to be obtained from the use of the asset by the enterprise</li></li></ul><li>DEPRECIATION<br />CAUSES<br /><ul><li> By contrast
  21. 21. By expiry of time
  22. 22. By obsolescene
  23. 23. By depletion
  24. 24. Permanent fall in price
  25. 25. By abnormal factors</li></ul>NEED<br /><ul><li> For determination of net profit or net loss.
  26. 26. For showing asset at fair and true value in the balance sheet.
  27. 27. Provision of funds for replacement of assets.
  28. 28. Ascertaining accurate cost of production.
  29. 29. Distribution of dividend out of profit only.</li></ul>FACTORS<br /><ul><li> Total cost of the asset.
  30. 30. Estimated useful life of the asset.
  31. 31. Estimated scrap value.
  32. 32. Chances to obsolescene.
  33. 33. Addition to assets.
  34. 34. Legal provision.</li></li></ul><li>CAUSES<br />INTERNAL CAUSES:<br /><ul><li>Wear and tear
  35. 35. Depletion</li></ul>EXTERNAL CAUSES:<br /><ul><li> Obsolescence
  36. 36. Passage of time</li></ul> ACCIDENT<br /> PERMANENT FALL IN PRICE<br />
  37. 37. NEEDS<br /> Determination of net profit or net loss.<br /> Showing assets at fair and true value in the balance sheet.<br /> Provision of funds for replacement of assets.<br /> Ascertaining accurate cost of production.<br /> Distribution of dividend out of profit only.<br /> Avoiding over payment of income tax.<br />
  38. 38. FACTORS OF DETERMINATION OF DEPRECIATION<br />Original cost of fixed asset i.e., purchase price plus freight and installation expenses.<br /> Estimated amount of expenditure on repairs during the useful life.<br /> Estimated useful life of asset after which it will be discarded.<br /> Estimated residual or scrap value.<br /> Possibility of obsolescence.<br /> 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.<br />
  39. 39. Assessment of Depreciation<br /><ul><li>Estimated useful life
  40. 40. Estimated residual value
  41. 41. Historical cost or Revalued amount</li></li></ul><li>Methods of Depreciation<br />1) STRAIGHT LINE METHOD<br /><ul><li>Amount of depreciation is fixed.
  42. 42. Useful to assets whose service remain uniform throughout the year. For eg: Furniture & fixtures</li></ul>2) WRITTEN DOWN VALUE METHOD<br /><ul><li>Rate of depreciation is fixed.</li></ul>3) ANNUITY METHOD<br /><ul><li>Depreciation is calculated from annuity table.</li></ul>4) SINKING FUND METHOD<br /><ul><li>The amount of depreciation created is invested outside.</li></ul>5) INSURANCE POLICY METHOD<br /><ul><li>Amount of depreciation of each year is paid as an insurance premium.</li></li></ul><li>6) ANNUAL EVALUATION METHOD<br />7) KILOMETRE METHOD<br /><ul><li>Depreciation calculated on the distance run by the transportation means.</li></ul>8) LABOUR HOUR RATE METHOD<br /><ul><li>Depreciation is calculated on the basis of labour hour worked.</li></ul>9) GLOBAL METHOD<br /><ul><li>Depreciation is calculated on the sum of all the assets.</li></ul>10) PRODUCTION UNIT METHOD<br /><ul><li>Mostly used in mines to calculate the depreciation on production.</li></ul>11) STATUATORY METHOD<br /><ul><li>Depreciation value/rate is fixed by this method.</li></li></ul><li>STRAIGHT LINE METHOD<br /> It is a very popular method because its simplicity & consistency. A fixed amount of original cost is charged as a depreciation every year. .<br /> Annual depreciation =cost of the assets- residual value<br /> Estimated economic life<br />
  43. 43. STRAIGHT LINE METHOD<br />DISADVANTAGES<br /> It ignores the fact that the service yielding ability of the asset fall while the repairs & maintenance cost increase with the passage of time.<br /> If an additional asset is acquired, the amount to be charged as depreciation needs to be calculated.<br /> ADVANTAGES<br />It is simple to calculate & easy to understand.<br /> It can reduce the book value of the asset to zero.<br /> The valuation of the asset each year in the balance sheet is reasonably fair.<br />
  44. 44. WRITTEN DOWN VALUE METHOD<br /> Amount of depreciation goes on declining every year and is recognized by income tax law.<br />LIFE OF ASSETS<br />
  45. 45. ESTIMATION OF WRITTEN DOWN VALUE METHOD<br />ADVANTAGES<br /><ul><li> Easy calculation.
  46. 46. Balanced effect on profit or loss account of different years.
  47. 47. Approved method by income . . tax authorities.
  48. 48. Logical method.
  49. 49. Suitable for assets having long . . life.</li></ul>DISADVANTAGES<br /><ul><li> The value of asset can not be reduced to zero.
  50. 50. No funds for replacement.
  51. 51. Loss of interest.
  52. 52. Higher rate of depreciation.
  53. 53. Inequal burden on profit and loss account.</li></li></ul><li>Change In Method Of Depreciation<br />Required by statute or law<br />Required for compiance with an accounting standards<br />Result in more appropriate preparation and presentation of financial statement <br />
  54. 54. Disclosure in the F.S<br />The depreciation methods used<br />The total depreciation for the period for each class of assets<br />The gross amount of class of assets and related accumulated depreciation<br />Other accounting policies ( relevant to depreciation)<br />The depreciation rates or useful lives of assets if they are different from principal rates <br />A change in the method of depreciation is considered as a change in accounting policy <br />
  55. 55. Disposal of Depreciation Assets<br />Important clarification u/s 350 of Companies Act 1956 <br /><ul><li>Depreciation should be charged even if assets remain idle
  56. 56. Depreciation should be provided on immovable assets
  57. 57. The number of shifts (double or multiple) for which the assets has been used should be considered for depreciation
  58. 58. For depreciation charge , Written Down Value(WDV)-is suggested though straight line method can also be adopted</li></li></ul><li>CONCLUSION<br />1. This Standard deals with depreciation accounting and applies to all depreciable assets, except the following items to which special considerations apply:—<br />(i) forests, plantations and similar regenerative natural resources;<br />(ii) wasting assets including expenditure on the exploration for and<br /> extraction of minerals, oils, natural gas and similar non regenerative resources. <br />(iii) expenditure on research and development;<br />(iv) goodwill and other intangible assets;<br />(v) live stock.<br />This standard also does not apply to land unless it has a limited useful life for the enterprise.<br />
  59. 59. 2. Different accounting policies for depreciation are adopted by different enterprises. <br /> Disclosure of accounting policies for depreciation followed by an enterprise is necessary to appreciate the view presented in the financial statements of the enterprise.<br />

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