Meaning Features of depreciation Causes of depreciation Need & importance of depreciation Factors determining the amount of depreciation Methods of allocating depreciation Illustration Exercise

1. CAREER POINT
UNIVERSITY
School of Commerce
& Management

2. Depreciation

3. I would like to express my special thanks of
gratitude to my teacher (Pragya Bhargav Ma’am (my
mentor); Assistant professor ) who gave me the
golden opportunity to do this wonderful project on
the topic (Depreciation),which also helped me in
doing a lot of Research and I came to know about
so many new things I am really thankful to them.
Secondly I would also like to thank my parents who
helped me a lot in finalizing this project within the
limited time frame.
Acknowledgement :

4.  Meaning
 Features of depreciation
 Causes of depreciation
 Need & importance of depreciation
 Factors determining the amount of
depreciation
 Methods of allocating depreciation
 Illustration
 Exercise
Content :

5. Depreciation is a
permanent & gradual
decrease in the
value of an assets
from any cause.
Meaning :

6. i. Depreciation is decline in the value of fixed assets
(except land).
ii. Depreciation is gradual and continuing process because
the value of assets decline either by their constant use
or obsolescence due to expiry of time.
iii. It decreases only the book value of the assets, not the
market value.
iv. It is a non-cash expenses. It does not involve any cash
outflow.
v. Such fall is of a permanent nature.
Features of depreciation :

7. o Due to constant use of fixed assets in business
operations wear & rear arises in them which results in
the reduction of their values.
o The value of majority of assets decreases with the
passage of time even if they are not being put to use in
the business.
o Due to new inventions and improved techniques, the old
assets become obsolete and may have to be discarded
even if they can be put to use physically.
o Sometimes a machine may be destroyed due to fire,
earthquake, flood etc. or vehicle may be damaged due
to accident.
o Depletion is the decrease in the value of wasting assets
such as mines, oil-wells etc. due to their constant use.
Causes of depreciation :

8.  For ascertaining the true profit & loss of
business.
 For showing the true and fair view of the
financial position of a business.
 To ascertain the accurate cost of
production.
 To provide funds for replacement of assets.
 To prevent the distribution of profits out
of capital.
 For avoiding over payment of income tax.
 Etc…..
Need, Importance or objects of providing depreciation

9. It is impossible to calculate the actual and true amount
of depreciation. It can only be estimated by keeping
the following factors into consideration :-
 Total cost of assets – the cost of fixed assets is
determined after adding all expenses incurred for
bringing the assets to usable condition, such as
freight, transit insurance and installation costs etc..
 Estimated useful life of assets – useful life of an
assets is estimated in terms of number of years, it
can be effectively used for business operations.
For example :- if a machine can work for 25 years but
is likely to become obsolete in 15 years on account of
availability of a better type of machine due to
improved technology, its useful life will be considered
as only 15 years .
Factor determining the amount of depreciation

10.  Estimated scrap value :- it is estimated sale
value of the assets at the end of its useful life.
It is also known as residual value or break-up
value.
For example :- a machine is purchased for ₹
1,00,000 and ₹ 10,000 spent on its freight and ₹
5,000 for installation. It is estimated that its
serviceable life will be 10 years at the end of
which period will have a scrap value of ₹ 20,000.
Depreciation in this case will be calculated on ₹
95,000 (i.e. ₹ 1,00,000 + ₹ 10,000 + ₹ 5,000 - ₹
20,000). Depreciation charged on this machine
will be
95,000
10
= ₹9,500 every year.
Continue…….

11. There are various methods of allocating
depreciation. These are :-
 Straight line method
 Written down value method
 Annuity method
 Depreciation fund method
 Insurance policy method
 Revaluation method
 Depletion method
 Machine hour rate method
Note :- but we studied only first two methods…
Methods of providing or allocating depreciation

12. This method is also termed as ‘Original cost method’
because under this method depreciation is charged at a
fixed percentage on the original cost of assets . The
amount of depreciation remains equal from year to year. So
this method is also known as ‘Equal installment method’ or
‘Fixed installments method’.
Yearly Depreciation =
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠 −𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑠𝑐𝑟𝑎𝑝 𝑣𝑎𝑙𝑢𝑒
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠
For example :- original cost of assets is ₹ 1,00,000 and its
scrap value as ₹ 20,000 after its estimated life of 10 years,
so the depreciation is ₹ 8,000 every year.
1,00,000 −20,000
10
= 8,000
I. Straight line method

13. Merits of Straight line method –
 It is very simple to calculate.
 There is no burden of depreciation on net profit because
the amount of depreciation is same every year.
 The value of assets reduced to zero.
Demerits of straight line method –
 Unequal charge against income.
 Unrealistic to write off the value of assets to zero.
 Difficult in determination of scrap value.
Suitability –
This method is suitable for those assets whose useful life
can be estimated accurately and which do not require much
expenses on repairs and renewals.
Continue……

14. Accounting treatment –
1. Entry or purchase of assets :-
Assets A/c Dr.
To Bank /Vendor A/c
2. Entry for providing depreciation at the end of each year :-
Depreciation A/c Dr.
To Assets A/c
3. Entry for the amount realised on sale of assets :-
Bank A/c Dr.
To Assets A/c
4. Entry in case of loss on sale of assets :-
Profit & loss A/c / Statement of profit & loss* Dr.
To Assets A/c
5. Entry in case of profit on sale of assets :-
Assets A/c Dr.
To profit & loss A/c / Statement of profit & loss
* In case of companies, a statement of profit & loss is prepared in
place of Profit & loss A/c
Continue……

15. Under this method, as the value of assets goes on
diminishing year after year, the amount of depreciation
charged every year also goes on declining.
For example :- machine ₹ 10,000 and depreciation charged
at 10% p.a. so the depreciation charged as:-
₹
1st year on ₹ 10,000 @ 10% 1,000
2nd year on ₹ 9,000(10,000 – 1,000) @ 10% 900
3rd year on ₹ 8,100 (9,000 - 900)@ 10% 810
4th year on ₹ 7,290 (8,100 - 810) @ 10% 729
And so on…….
It is also known as ‘Reducing installment method’ or ‘
Diminishing Balance method’.
2. Written Down Value Method

16. Merits of written down value method :-
 It is very easy to calculate.
 Equal charges against income.
 Balance of assets is never written off to zero.
 This method is approved by Income tax authorities.
Demerits of written down value method :-
• Assets cannot be completely written off.
• Omission of interest factor.
• Difficulty in determining the rate of depreciation.
• Knowledge of original cost and upto-date depreciation is
not possible.
Suitability :-
This method is suitable in case of having a comparatively
long life and which require considerable repairs in the later
years when they become older, such as building, plant etc…
Continue…….

17. There are two methods of recording depreciation in the
books :-
i). First method : By charging to asset account :- in this case ‘
Provision for depreciation’ is not maintained and the
depreciation is directly credited to the Assets A/c. Hence
the assets a/c appears in the Ledger at a written down value.
ii). Second method : By creating provision for depreciation
a/c :- in such case, the provision for depreciation a/c is
maintained instead of assets a/c.
Provision for depreciation A/c / Accumulated depreciation
A/c Dr.
To Asset A/c
Method of recording depreciation

19. Sol :- the rate of depreciation is not given in the question -
Annual depreciation =
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 −𝑆𝑐𝑟𝑎𝑝 𝑣𝑎𝑙𝑢𝑒
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡
=
₹ 1,00,000 −₹ 20,000
10 𝑦𝑒𝑎𝑟𝑠
= ₹ 8,000
Rate of depreciation =
𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝑡𝑜𝑡𝑎𝑙 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠
× 100
=
8,000
1,00,000
× 100 = 8%
Q 1. On 1st January 2012, Radhika steel Ltd. purchase a machine for ₹ 90,000 and
spent ₹6,000 on its carriage and ₹ 4,000 on its erection. On the date of purchase,
it was estimated that the effective life of the machine will be 10 years after 10
years is scrap value will be ₹ 20,000. Prepare machine a/c and depreciation a/c
for 2 years after providing depreciation on straight line method. Accounts are
closed on 31 December every year.

20. Dat
e
Particulars
Amount
₹
Date Particulars
Amount
₹
2012
Jan.
1
To bank a/c 1,00,000
2012
Dec.
31
By depreciation a/c 8,000
Dec.
31
By balance c/d 92,000
1,00,000 1,00,000
2013
Jan.
1
To balance b/d 92,000
2013
Dec.
31
By depreciation a/c 8,000
Dec.
31
By balance b/d 84,000
92,000 92,000
2014
Jan
1.
To balance b/d 84,000
Continue…….
Machine A/c
Dr. Cr.

21. Depreciation A/c
Dr. Cr.
Continue………
Date Particulars
Amount
₹
Date Particulars
Amount
₹
2012
Dec.
31
To machine a/c 8,000
2012
Jan.
1
By statement of
profit & loss
8,000
2013
Dec.
31
To machine a/c 8,000
2013
Jan.
1
By statement of
profit & loss
8,000

22. Q 2. Alpine traders purchased a machine on
April 1, 2013 at a cost of ₹ 8,000 and spent
₹ 2000 on its installation. The firm writes
off depreciation @ 10% p.a. by written down
value method. The scrap value of the plant
at the end of its economic life of 4 years is
expected to be ₹ 6,561.
Show the machine account for 4 years in
the books of Alpine traders. The books
closed on 31st march every year.

23. Date Particulars
Amount
₹
Date Particulars
Amount
₹
2013
Apr. 1
To bank a/c 10,000
2014
Mar.
31
By depreciation
a/c
1,000
Mar.
31
By balance c/d 9,000
10,00 10,000
2014
Apr. 1
To balance b/d 9,000
2015
Mar.
31
By depreciation
a/c
900
Mar.
31
By balance c/d 8,100
9,000 9,000
2015
Apr. 1
To balance b/d 8,100
2016
Mar.31
By depreciation
a/c
810
By balance c/d 7,290
8,100 8,100
Sol :- Machine A/c
Dr. Cr.

24. 2016
Apr.
1
To balance b/d 7,290
2017
Mar.
31
By depreciation a/c 729
Mar.
31
By balance c/d 6,561
7,290 7,290
Continue….

25. Q 3. X Ltd. Purchased on April 1, 2014 a
second hand plant for ₹ 4,00,000 and
immediately spent ₹ 80,000 for its
overhauling and ₹ 20,000 for its
installation. On Oct 1, 2016 the plant
become obsolete and was sold for ₹
2,00,000. Depreciation is provided at
10% p.a. on original cost method.
Accounts are closed each year on 31st
march. Prepare the plant a/c and
provision for depreciation a/c.

26. Date Particulars
Amount
₹
Date Particulars
Amount
₹
2014
Apr.
1
To bank a/c 5,00,000
2015
Mar. 31
By balance c/d 5,00,000
5,00,000 5,00,000
2015
Apr.
1
By balance b/d 5,00,000
2016
Mar. 31
By balance c/d 5,00,000
5,00,000 5,00,000
2016
Apr.
1
By balance b/d 5,00,000
2016
Oct. 1
By bank a/c 2,00,000
Oct. 1
By provision for
depreciation a/c
1,25,000
Oct. 1
By statement of
profit & loss
1,75,000
5,00,000 5,00,000
Sol :- Plant A/c
Dr. Cr.

27. Date Particulars
Amount
₹
Date Particulars
Amount
₹
2015
Mar.
31
To balance c/d 50,000
2015
Mar.
31
By depreciation a/c 50,000
50,000 50,000
2016
Mar.
31
To balance c/d 1,00,000
2015
Apr. 1 By balance b/d 50,000
2016
Mar.
31
By depreciation a/c 50,000
1,00,000 1,00,000
2016
To plant a/c 1,25,000
2016
Apr. 1
By balance b/d 1,00,000
Oct. 1 By depreciation a/c 25,000
1,25,000 1,25,000
Continue….
Provision for depreciation a/c
Dr. Cr.

29. Q 1. from the following transaction of a
concern, prepare machinery account for the
year ending 31st march, 2017 :-
2016
April 1 : Purchased a second-hand machinery
for ₹ 40,000
April 1 : Spent ₹ 10,000 on repairs for making
it serviceable.
Sept. 30 : Purchased additional new machinery
for ₹ 20,000
Dec. 31 : Repairs and renewals of machinery ₹
2,000

30. Q 2. On 1st July 2008, Seeta
Paper Ltd. purchased a plant for ₹
1,50,000 and paid ₹ 10,000 as
freight on its carriage.
Depreciation was provided at 15%
p.a. on straight line method on
this plant. On 1st October, 2013
this plant was sold for ₹ 80,000.
prepare plant a/c for 4 years,
assuming that the books closed on

31. Q 3. On 1st August, 2012, Gadore Ltd.
purchased a machinery for ₹ 3,00,000. On 1st
November, 2013 another machinery was
purchased for ₹ 1,80,000. On 1st July 2014,
the machine purchased on 1st august 2012 was
sold for ₹ 1,68,000 and on the same date a
fresh machinery is purchased for ₹ 2,00,000.
Depreciation was provided @ 10% p.a. on the
reducing balance method. Books are closed on
31st march every year. You are required to
prepare machinery account and provision for
depreciation account for three years ending
31st march, 2015.

32. Thank you