What is Depreciation?

In accounting terms, depreciation is defined as the reduction of recorded cost of a fixed

asset in a systematic manner until the value of the asset becomes zero or negligible.

An example of fixed assets are buildings, furniture, office equipment, machinery etc.. A
land is the only exception which cannot be depreciated as the value of land appreciates
with time.

Depreciation allows a portion of the cost of a fixed asset to the revenue generated by the
fixed asset. This is mandatory under the matching principle as revenues are recorded
with their associated expenses in the accounting period when the asset is in use. This
helps in getting a complete picture of the revenue generation transaction.

An example of Depreciation – If a delivery truck is purchased a company with a cost of

Rs. 100,000 and the expected usage of the truck are 5 years, the business might
depreciate the asset under depreciation expense as Rs. 20,000 every year for a period of
5 years.

How to calculate depreciation in small business?

There three methods commonly used to calculate depreciation. They are:

1. Straight line method

2. Unit of production method
3. Double-declining balance method

Three main inputs are required to calculate depreciation:

1. Useful life – this is the time period over which the organisation considers the fixed
asset to be productive. Beyond its useful life, the fixed asset is no longer cost-effective
to continue the operation of the asset.
2. Salvage value – Post the useful life of the fixed asset, the company may consider
selling it at a reduced amount. This is known as the salvage value of the asset.
3. The cost of the asset – this includes taxes, shipping, and preparation/setup expenses.

Unit of production method needs the number of units used during production. Let’s take a
look at each type of Depreciation method in detail.

Types of depreciation

1) Straight-line depreciation method

This is the simplest method of all. It involves simple allocation of an even rate of
depreciation every year over the useful life of the asset. The formula for straight line
depreciation is:

Annual Depreciation expense = (Asset cost – Residual Value) / Useful life of the asset

Example – Suppose a manufacturing company purchases a machinery for Rs. 100,000

and the useful life of the machinery are 10 years and the residual value of the machinery
is Rs. 20,000
Annual Depreciation expense = (100,000-20,000) / 10 = Rs. 8,000

Thus the company can take Rs. 8000 as the depreciation expense every year over the
next ten years as shown in depreciation table below.

Year Original cost – Residual value Depreciation expense

1 Rs. 80000 Rs. 8000

2 Rs. 80000 Rs. 8000

3 Rs. 80000 Rs. 8000

4 Rs. 80000 Rs. 8000

5 Rs. 80000 Rs. 8000

6 Rs. 80000 Rs. 8000

7 Rs. 80000 Rs. 8000

8 Rs. 80000 Rs. 8000

9 Rs. 80000 Rs. 8000

10 Rs. 80000 Rs. 8000

Question 1:

On 1st April, 2007, a limited company purchased a Machine for ₹ 1,90,000 and spent ₹ 10,000 on its installation. At
the date of purchase, it was estimated that the scrap value of the machine would be ₹ 50,000 at the end of sixth year.
Give Machine Account and Depreciation A/c in the books of the Company for 4 years after providing depreciation by
Fixed Installment Method. The books are closed on 31st March every year.
ANSWER:

Machinery Account

Dr. Cr.

Date Particulars Amount (Rs) Date Particulars Amount (Rs)

2007 2008

Apr. To Bank A/c 2,00,000 Mar. 31 By Depreciation A/c 25,000

01 (1,90,000 + 10,000)

Mar. 31 By Balance c/d 1,75,000

2,00,000 2,00,000

2008 2009

Apr. To Balance b/d 1,75,000 Mar. 31 By Depreciation A/c 25,000

01

Mar. 31 By Balance c/d 1,50,000

1,75,000 1,75,000

2009 2010

Apr. To Balance b/d 1,50,000 Mar. 31 By Depreciation A/c 25,000

01

Mar. 31 By Balance c/d 1,25,000

1,50,000 1,50,000

2010 2011

Apr. Balance b/d 1,25,000 Mar. 31 Depreciation A/c 25,000

01

Mar. 31 Balance c/d 1,00,000

1,25,000 1,25,000

Depreciation Account

Dr. Cr.

Amount (Rs
Date Particulars Date Particulars Amount (Rs)
)

2008 2008
 Mar. To Machinery A/c 25,000 Mar. 31 By Profit and Loss A/c 25,000
31

25,000 25,000

2009 2009

Mar. To Machinery A/c 25,000 Mar. 31 By Profit and Loss A/c 25,000
31

25,000 25,000

2010 2010

Mar. To Machinery A/c 25,000 Mar. 31 By Profit and Loss A/c 25,000
31

25,000 25,000

2011 2011

Mar. To Machinery A/c 25,000 Mar. 31 By Profit and Loss A/c 25,000
31

25,000 25,000

Working Note: Calculation of Depreciation

Depreciation = 200000 – 50000/6 = 25000

X Co. Ltd. purchased a machine on 1st April, 2008 for Rs 1,60,000. On October 1, 2009
another machine was purchased for Rs 1,40,000. On October 1, 2010 the first machine
was sold for Rs 1,20,000. On the same date, another machine was purchased for Rs
1,00,000. On October 1, 2011 the second machine was sold for Rs 92,000.
 Rate of depreciation was 10% on original cost annually on 31st March. On 31st March,
2011 the method of charging depreciation was changed to diminishing balance method,
the rate being 15%.

Prepare Machine Account for the years ending 31st March, 2009, 2010, 2011, and 2012.

Machinery A/c

Date Particular Amt Date Particular Amt

2008 2009
Apr 1 To Bank (I) 160000 Mar 31 By Depreciation A/c (I) 16000
Mar 31 By Bal c/d (I) 144000
160000 160000
2009 2010
Apr 1 To Bal B/d (I) 144000 Mar 31 By Depreciation A/c
Oct 1 To Bank (II) 140000 I 16000
II 7000 23000
Mar 31 By Bal c/d
I 128000
II 133000 261000
284000 284000
2010 2010
Apr 1 To Bal B/d Oct 1 By depreciation A/c (I) 8000
I 128000 Oct 1 By Bank (I) 120000
II 133000 261000 2011
Oct 1 To Bank A/c (III) 100000 Mar 31 By depreciation A/c
II 14000
III 5000 19000
Mar 31 By Bal c/d
II 119000
III 95000 214000
361000 361000
2011 2011
Apr 1 To Bal B/d Oct 1 By Depreciation A/c (II) 8925
II 119000 Oct 1 By Bank A/c (II) 92000
III 95000 214000 Oct 1 By Profit & Loss A/c (II) 18075
2012
 Mar 31 By Depreciation A/c (III) 14250
Mar 31 By Bal c/d (III) 80750
214000 214000

Working Note :

Depreciation on II Machinery = 140000 * 10 % * 6/12 = 7000

Depreciation on I Machinery from 1 April 2010 – Oct 1, 2010 = 160000 * 10% *

6/12 = 8000

Depreciation on III Machinery from Oct 1, 2010 – Mar 31, 2011 = 100000 * 10% *
6/12 = 5000

Depreciation on II Machinery From Apr 1, 2011 – Oct 1, 2011 = 119000 * 15 % *

6/12 = 8925

On Oct 1, 2011 Machinery II = 119000 - 8925

On Oct 1, 2011 Value of II Machinery = 110075

Loss on Machinery II = 110075 – 92000 = 18075

Depreciation on Machinery III from Apr 1, 2011 – Mar 31, 2012 = 95000 * 15%

= 14250
April 1, 2010 – 100000

Mar 31, 2011 – 100000 * 10% = 10000

Remaining value = 100000 – 10000 = 90000

Mar 31, 2012 = 90000 * 10 % = 9000

Remaining Value = 90000 – 9000 = 81000

Mar 31, 2013 = 81000 * 10% = 8100

Price of the asset * ( 100 – Dept Rate )life of machinery = WDV

100

50000 * {(100 – R)/100}5= 16384

{100 – R/100}5 = 16384 /50000

100 – R/100 = 1/5_/16384/50000

Date Particular Amt Date Particular Amt
2009 2010
Apr 1 To Bank A/c (I) 30000 Mar 31 By Dep A/c
July 1 To Bank A/c (II) 12000 I 6000
II 1800 7800
Mar 31 By Bal c/d
I 24000
II 10200 34200
42000 42000
2010 2011
Apr 1 To Bal b/d Mar 31 By Dept A/c
I 24000 I 6000
II 10200 34200 II 2400 8400
Mar 31 By bal c/d
I 18000
II 7800 25800
34200 34200
2011 2011
Apr 1 To bal b/d Oct 1 BY dep A/c (I) 3000
I 18000 Oct 1 By Bank a/c (I) 12000
II 7800 25800 Oct 1 By profit & loss A/c 3000
Oct 1 To Bank a/c (III) 26000 2012
Mar 31 By Dep A/c
II 2400
III 2600 5000
Mar 31 By bal c/d
II 5400
III 23400 28800
51800 51800
2012 2012
Apr 1 To bal c/d Aug 1 By Dept a/c (III) 1733
II 5400 Aug 1 By Bank a/c (III) 20000
III 23400 28800 Aug 1 By profit & Loss A/c 1667
Aug 1 To bank a/c (IV) 30000 2013
Mar 31 By dept A/c
II 2400
IV 4000 6400
Mar 31 By bal c/d
II 3000
IV 26000 29000
58800 58800
2013 2014
Apr 1 To bal b/d Mar 31 By dept A/c
II 3000 II 2400
IV 26000 29000 IV 6000
Oct 1 To Bank A/c (V) 31500 V 3150 11550
Mar 31 By bal c/d
II 600
IV 20000
V 28350 54350
60500 60500
2014 2014
Apr 1 To bal b/d Dec 28 By Dept A/c (V) 4725
II 600 Dec 28 By insurance claim
IV 20000 A/c 20000
V 28350 54350 Dec 28 By profit & loss A/c 3625
2015
Mar 31 By dept A/c
II 600
IV 6000 6600
Mar 31 By bal c/d
 IV 14000 14000
54350 54350

12000 * 20% * 9/12 = 1800

30000* 20% * 6/12 = 3000

18000 – 3000 = 15000

26000 * 20% * 6/12 = 2600

26000 * 20% * 4/12 = 1733

23400 – 1733 = 21667

30000 * 20% * 8/12 = 4000

31500 * 20% * 6/12 = 3150

31500 * 20% * 9/12 = 4725

28350 – 4725 = 23625