Management- Financial Accounting DEPRECIATION ACCOUNTING Objectives of Depreciation Accounting Factors Affecting Depreciation Accounting Treatment

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(HONS.)
FINANCIALACCOUNTING
Code: 888101
DEPRECIATION ACCOUNTING
By:
Prerna Sehgal
Assistant Professor

2. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
MEANING
Accounting Standard(AS) – 6 : Depreciation Accounting , issued
by Institute Of Chartered Accountants Of India states that ;
“Depreciation is a measure of the wearing out , or other loss
of value of a depreciable asset arising from use, time or
obsolescence. Depreciation is allocated so as to charge a fair
proportion of the cost in each accounting period during the
expected useful life of the asset. Depreciation includes
amortization.”

3. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
Objectives of Depreciation Accounting
• To calculate true income
• To show 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 the legal requirements
• To allocate the cost of fixed assets

4. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
Factors Affecting Depreciation
The Historical Cost
of the asset
Salvage( Residual
or scrap ) value
Estimated useful
life

5. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
Accounting Treatment
There are two alternative methods of recording:
• To reduce the value of asset by charging
depreciation directly to the asset account
every year
• To create a separate provision for depreciation
and accumulate the depreciation amount year
after year in that account.

6. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
Depreciation Directly Charged to Asset
Account
• Depreciation A/c Dr.
To Asset A/c
(With amount of depreciation)
• Profit & loss A/c Dr.
To Depreciation A/c
(With amount of depreciation)
Note: The asset will be shown in the balance
sheet at Book Value(cost less depreciation)

7. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
Provision For Depreciation
• Depreciation A/c Dr.
To Provision for Depreciation A/c
(With amount of depreciation)
• Profit & loss A/c Dr.
To Depreciation A/c
(With amount of depreciation)
Note: The asset will be shown in the balance
sheet at Original Cost.

8. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
Methods of providing Depreciation
• Straight Line Method
• Diminishing Balance Method
• Annuity Method
• Sinking Fund Method
• Revaluation Method
• Sum-of-the- Years’ Digits Method
Note: The most commonly employed methods are
Straight line method and Diminishing Balance
method.

9. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
Straight Line Method
Straight line Method assumes allocation of
equal amount of depreciation in each
accounting periods of the service life of the
asset.
Annual depreciation
= Original Cost - Salvage value
Estimated useful Life(Years)

10. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75
Diminishing Balance Method
Under Diminishing Balance 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 book value means the
asset cost reduced by depreciation of the
earlier years.

11. TRINITY INSTITUTE OF PROFESSIONAL STUDIES
Sector – 9, Dwarka Institutional Area, New Delhi-75