FINANCIAL ACCOUNTING- Depreciation The primary or general meaning of the word ‘depreciation’ is the fall in quality or value of a fixed asset through physical wear and tear in use or passage of time or from any other cause. Depreciation takes place irrespective of regular repairs and efficient maintenance. Depreciation covers depletion,amortization and obsolescence. ACCOUNTING CONCEPT OF DEPRECIATION CHARACTERISTICS OF DEPRECIATION Depreciation is a gradual but continuous fall in book value of fixed assets. It is a process of allocating the depreciable cost over the estimated useful life of the fixed asset. It arises directly through the deterioration. It is not a substitute of repairs. Depreciation charge is not an exact amount but based on estimate. It is purely an internal transaction. Depreciation is a charge against the profits. NEED FOR DEPRECIATION To calculate the true income. To show the true financial position . To retain, out of profits, funds for replacement. To calculate the proper cost of the product. To compute tax liability of the owner. To meet legal requirements. To allocate the cost of fixed assets.

1. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
Affiliated Institution of G.G.S.IP.U, Delhi
B.COM(H)
FINANCIAL ACCOUNTING
888101
BY: NAMRATA YADAV

2. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
DEPRECIATION
• The primary or general meaning of the word ‘depreciation’ is
the fall in quality or value of a fixed asset through physical
wear and tear in use or passage of time or from any other
cause.
• Depreciation takes place irrespective of regular repairs and
efficient maintenance.
• Depreciation covers depletion,amortization and obsolescence.

3. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
ACCOUNTING CONCEPT OF DEPRECIATION
• Depreciation is an important business expense which must be
charged to profit & loss account before arriving at the net
profit for the year. The cost of fixed assets in the form of
depreciation has to be matched against the revenues of
different years earned from the use of the asset.

4. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
CHARACTERISTICS OF DEPRECIATION
• Depreciation is a gradual but continuous fall in book value of
fixed assets.
• It is a process of allocating the depreciable cost over the
estimated useful life of the fixed asset.
• It arises directly through the deterioration.
• It is not a substitute of repairs.
• Depreciation charge is not an exact amount but based on
estimate.
• It is purely an internal transaction.
• Depreciation is a charge against the profits.

5. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
CHARCTERISTICS OF DEPRECIATION
• Depreciation is not a source of funds for the replacement of
an asset.
• Total depreciation cannot exceed its depreciable value or
original cost where scrap value is nil.
• Depreciation has no relationship with the market value of an
asset.

6. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
NEED FOR DEPRECIATION
• To calculate the true income.
• To show the true financial position .
• To retain, out of profits, funds for replacement.
• To calculate the proper cost of the product.
• To compute tax liability of the owner.
• To meet legal requirements.
• To allocate the cost of fixed assets.

7. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
CAUSES OF DEPRICIATION
 Wear and tear from use
 Passage of time
 Inadequacy
 Obsolescence
 Other physical factors are fire, flood, earthquake or accident.
 Depletion
 Time factor

8. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
FACTORS AFFECTING DEPRECIATION
 The cost of the asset
 Salvage or residual value
 Estimated useful life
Depreciation = cost of asset – salvage value
estimated useful life

9. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
ACCOUNTING TREATMENT
 To reduce the value of asset by charging depreciation directly
to the asset account every year i.e., to credit of asset
account.
 To create a separate provision for depreciation and
accumulate the depreciation amount in the account without
disturbing the concerned asset account i.e., to credit the
provision for depreciation account.

10. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
METHODS OF DEPRECIATION
 Straight line Method
 Diminishing Balance Method
 Annuity Method
 Depreciation Fund Method
 Insurance Policy Method
 Machine Hour Rate Method
 Depletion Method
 Revaluation Method
 Group Depreciation Method
 Sum – of-the- years Digits Method

11. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
STRAIGHT LINE METHOD
This method assumes that each accounting period receives the
same benefit from using the asset as every other period. It is
called straight line because it allocates an equal amount of
depreciation in each of the accounting periods of the service
life of the asset.
Annual depreciation = original cost- salvage value
estimated useful life of asset

12. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
ADVANTAGE OF SLM
 This method is easy to use.
 This method realistically matches cost and revenue.
 This method is recognized by AS-6 issued by ICAI and also by
Companies Act ,1956.
 The valuation of the asset each year in the balance sheet is
reasonably fair.

13. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
DISADVANTAGE OF SLM
 It does not consider the interest on the amount invested in
fixed asset.
 It is based on wrong assumptions of equal utility of the asset
during its useful life.
 This method is not recognized by the INCOME TAX ACT1961.
 If an additional asset is purchased, the amount of
depreciation on that asset has to be recalculated.

14. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
WRITTEN DOWN VALUE METHOD
• Under this method a fixed rate or percentage is applied to the
original cost in the first year and to the book value in
subsequent years. The depreciation is calculated on the
reducing balance and not on the original cost.
• The rate of depreciation in written down value is calculated
as:
r = 1-n S *100
C

15. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
ADVANTAGE OF WDV
• The higher depreciation is charged in the earlier years whe
the machine is most efficient.
• The obsolescence problem is given due care because the
major part of the depreciation is charged in earlier years.
• The asset would never be completely written off with the
result that the management can keep a track of the asset.
• The method is recognized by AS-6 and Companies Act 1956
and is applicable for tax purposes.

16. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
DISADVANTAGE OF WDV
• This method requires much figure work.
• Such a method involves the use of mathematical tables where
the arithmetic is difficult.
• It does not take into consideration the interest on the amount
invested in fixed asset.
• It takes very long time to write off the asset