This document discusses depreciation, which is the cost of fixed assets consumed during a period. Depreciation spreads out the cost of an asset over its useful life and accounts for the scrap value it can be sold for after a period. Businesses track depreciation for several reasons, including accurately reporting profits and replacing assets. Common depreciation methods include straight-line, reducing balance, and revaluation. The document outlines journal entries, important accounts, and formats for tracking depreciation of fixed assets.

1. DEPRECIATION Hassan Rameez Hussain
s2201057
ED619 - Information Technology in Education
PPT FOR ED619 BLOG

2. WHAT IS DEPRECIATION?
* Depreciation is the cost of fixed assets consumed during the period
* The spread of consumption of assets
* The cost that the asset can be sold after a certain period is scrap
value

3. REASONS FOR DEPRECIATION
1. Wear & Tear
2. Erosion, rust, rot & decay
3. Obsolescence
4. Inadequacy
5. Time Factor
6. Depletion

4. WHY BUSINESS NEED TO SHOW
DEPRECIATION
1. To reveal correct profit or loss
2. To show correct financial position
3. To make provision for replacement of asset
4. To show the allocation of the depreciable amount of its assets over
their estimated useful lives
5. To charge the cost of capital expenditure to profits earned over the
useful life of the asset

5. METHODS OF DEPRECIATION
1. Straight line method
Calculating depreciation that involves deducting the same amount
every accounting period from the original cost of the fixed asset.
Calculation of depreciation:
Depreciation = [ Cost – Scrap Value ] / Estimated life (Years)
Depreciation = [ Cost * Rate ] * [ Months used / 100 ]

6. METHODS OF DEPRECIATION
2. Reducing Balance Method
Calculating annual depreciation as a percentage of total fixed assets
Calculation:
Depreciation Year 1: Cost * Rate
Depreciation Year 2: [Cost – Previous Year Depreciation ] * Rate

7. METHODS OF DEPRECIATION
3. Revaluation Method
Difference of assets at the beginning of the year and the end of the
year is taken as the depreciation. Usually used for tools.
Calculation:
Depreciation: Balance b/d + Purchases – Disposal Book Value –
Closing Balance
Depreciation: [ Balance b/d + Purchases – Disposal Book Value ] *
Rate

8. JOURNAL ENTRIES: DEPRECIATION

9. JOURNAL ENTRIES: DISPOSAL

10. IMPORTANT ACCOUNTS TO
PREPARE
1. Fixed Asset Account
2. Provision for depreciation account
3. NCA Disposal Account
4. Income Sheet Extracts
5. Balance Sheet Extracts

11. FORMATS: FIXED ASSET ACCOUNT

12. FORMATS: ASSET DISPOSAL
ACCOUNT

13. FORMATS: PROVISION FOR
DEPRECIATION