DEPRICIATION & FINAL ACCOUNTS

DEPRECIATION: It is the process of reduction in the value of Tangible fixed asset due to efflux of
time.

AMORTISATION:It is the process of reduction in the value of Intangible assets due to Usage of Time.

DEPLETION: It is the process of reduction of assets due to extraction and production.

OBSOLESCENCE: It is the process of decrease in the economic value of asset due to various factors
like invention of new techniques, Change in Climate etc.

FEATURES OF DEPRECIATION
 Depreciation is a gradual but continous fall in book value of fixed assets.
 Depreciation is the charge against profit.
 Depreciation has no relationship with market value of an asset.
 Depreciation is not a substitute for repairs.
 Depreciation has no relationship with market value of an asset.

CAUSES OF DEPRECIATION
 Physical loss of an asset due to wear and tear and passage of time.
 Due to functional factors like inadequency and obsolescence
 Depletion
 Time Factor

PROVISION FOR DEPRECIATION

1) Depreciation a/c ------------------DR

To Provision for Depreciation a/c

2) P/L A/C------------------------Dr

To Depreciation a/c

METHODS OF PROVIDING
DEPRECIATION
 Straight Line Method
 Written Down Value Method
 Annuity Method
 Revaluation Method
 Group Depreciation Mehod
 Insurance Policy Method
 Machine Hour Rate Method
 Depreciation Fund Method
 DEPRICIATION & FINAL ACCOUNTS
 Production Method
 Sum Of Year’s Digits Method

STRAIGHT LINE METHOD

Also called as the fixed installment method as it allocates an equal amount of depreciation in each of
the accounting periods.

Original Cost−Estimated Salvage Value

Annual Depreciation =
Estimated Usefullife ∈Years
Amount of Depreciation
Rate of Depreciation =
Original Costs

WRITTEN DOWN VALUE METHOD

A fixed rate or percentage is applied to the original cost in the first year and to the book value in
subsequent years.

R = 1−n √ S
C
× 100

S= Scrap Value, C= Cost of the Asset, n=Number Of Years

SALE OR DISPOSAL OF FIXED ASSETS

(i) If the sale price is more than book value, the difference is profit on sale.
(ii) If the sale price is less than book value, the difference is loss on sale.

RELEVANT JOURNAL ENTRIES

(i) On The Sale of Asset

Cash/Bank A/C----------------------Dr (with total sale price)

To Asset A/c

(ii) (a) Profit on sale of assets

Asset Account--------------Dr

To Profit and Loss Account

(b) Loss on sale of Asset

Profit and Loss Account------------------------Dr

To Asset Account

ASSET DISPOSAL(SCRAPED) ACCOUNT

Account as under
 DEPRICIATION & FINAL ACCOUNTS
Asset disposal account-----------------------Dr

To Asset Account

For sale of asset

Cash/Bank Account---------------------------Dr

To Asset Disposal Account

For Profit on sale

Asset Disposal Account----------------------Dr

To Profit and Loss Account

For Loss

Profit and Loss Account------------------------Dr

To Asset Disposal Account

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FINAL ACCOUNTS
These mainly includes

 Trading Account
 Profit and Loss Account
 Balance sheet

TRADING ACCOUNT

This account is being made to record the gross profit or suffered gross loss.

Dr Cr

PARTICULARS RS PARTICULARS RS
To Opening Stock Xx By Closing Stock Xx
To Purchases Xx By Sales Xx
To Expenses & Factory Expenses By Gross Loss Xx
 Freight xx
 Cartage xx
 Carriage Inwards
xx
 Import Duty xx
 Octroi xx
 Excise Duty
xx
 DEPRICIATION & FINAL ACCOUNTS
 Dock Dues xx
 Cleaning Charges xx
 Lighting xx
 Heating xx
 Rent and rates xx Xx
 Insurance of factory xx Xx

____
To Royalty
To Gross Profit
PROFIT/LOSS ACCOUNT

This account is prepared to record the net profit or net loss.

Dr Cr

PARTICULARS Rs PARTICULARS Rs
To Gross Loss Xx By Gross Profit Xx
To General Expenses(other than Xx By All Incomes Xx
Factory) By Net Loss Xx
To Net Profit Xx

BALANCE SHEET

It is being prepared to show the financial position of the company on a specific date. It shows the
itemwise-list of liabilities and assets of a business.

Liabilities Rs Assets Rs
Current and Non Current Liabilities Current & Non-Current Assets