Depreciation

Depreciation Meaning
Depreciation is diminution in the
value of capital asset either due to
its use or lapse of time.
Charged on ‘Useful Life’ of an asset.
It is a non-cash expense.
Different from Depletion.
 Why is it Charged

To give a true picture of assets in

the Balance Sheet.
To make provision for replacement
of assets.
 Why is it Charged?
Assets are recorded at their historic
values in the Balance Sheet.
Depreciation is charged to make an
adjustment in some other asset i.e. cash
to give overall true picture of assets in
the balance sheet.
Methods of Charging Depreciation
Straight Line Method (SL Method)
Historical Value of Asset/Expected
Life in years.
Value of asset reduces to zero on the
expiry of life of asset.
Depreciation amount is uniform.
Methods of Charging Depreciation
Reducing Balance Method or Written Down
Value Method (WDV Method).
Fixed rate of depreciation charged throughout
the life of an asset.
Charged on reducing value.
Value of asset never reaches zero.
Depreciation amount is the highest in the first
year and keeps on decreasing in the successive
years.
 WDV Method
Suppose value of asset is Rs. 1,00,000
Expected Life=10 years.
Annual Rate of Depreciation is 10%
First year depreciation amount is 10% of
1,00,000=10,000
Second year depreciation amount is 10% of
90,000=9,000. And so on.
 How Depreciation is Charged?
Income Tax Act, 1961
Makes provisions for rates of
depreciation for different assets. These
rates are the highest rates and the firm
can’t charge rates higher than prescribed
rates.
Enforces the use of only WDV method.
 How Depreciation is Charged?
The Companies Act, 1956
The companies are free to charge any rate of
depreciation in view of future replacement
cost.
Can make use of any of the methods. But once
the method is chosen, need to be consistent
with it.
 Example
Profits before depreciation and tax=
1,00,000
Depreciation under IT Act (@10%) = 10,000
Tax (@30% on 90,000)= 27,000
Additional Depreciation (under the
provisions of the Companies Act) =
20,000
Profits after Tax and Depreciation = 43,000
Thank You