AS-6

(REVISED)
ACCOUNTING
FOR
DEPRECIATIO
N
 DEPRECIATION
ACCOUNTING
 “Depreciation Accounting” was issued by the Institute in 1985 , in the
context of insertion of schedule xiv in the companies act in 1988 , the
institute brought out a Guidance note on Accounting for Depreciation in
Companies. The guidance note differed from AS-6 in respect of accounting
treatment of (a)change in the method of depreciation & (b)change in the
rates of depreciation

 Based on the recommendation of the Accounting standards Board & also in

the context of delinking the rate of depreciation under the Companies
(Amendment) Act 1988 , the council of the institute at its meeting held on
may 26-29,1994 decided to bring AS-6 with the guidance note in respect of
afore mentioned matter.
 INTRODUCTION
“Depreciation is loss of value of an asset”
Depreciation means :
 A measure of wearing out
 Consumption other loss of value of a asset arising from use
 Passage of time , obsolesences through technology and
market changes
 Amortization of an asset

Depreciation is nothing but allocation of total cost of assets

over its useful life.
 APPLICABILITY
 This Accounting standard is applicable to all depreciable assets
Except the following
• Forests & plantations
• Wasting assets , minerals and natural gas
• Expenditure on research and development
• Goodwill
• Live stock- cattle animal husbandry

WHAT DO YOU MEAN BY DEPRECIABLE ASSET :

 They are expected to be used for more than one accounting year
 Have a limited useful life
 Are held use in production of goods & services
 CALCULATION OF
DEPRECIATION
The amount of depreciation is calculated as under:
 Historical cost or other amount in place of historical cost like revalued amount
 Estimated useful life of depreciable assets
 Estimated residual / scrap value of depreciable asset.

cost - (scrap value at the end of useful life)

Depreciation amount = estimated useful life in no. of years

COST OF DPRECIABLE ASSET : it means

Is total cost spent in connection with its acquisition
 Installation and commissioning for add item
 Or improvement of the depreciable asset
Contd…
THE HISTORICAL COST MAY CHANGE DUE
TO FOLLOWING FACTORS
 Increase / decrease in long term liability on
account of exchange fluctuation
 Price-adjustment
 Changes in duties
 Revaluation of depreciable assets
 Other similar reason
ESTIMATED USEFUL LIFE OF DEPRECIABLE ASSET :

“USEFUL LIFE “ is either

 The period over which a depreciable asset is expected to be used by the
enterprise
(OR)
 The number of production or similar units expected to be obtained from the
use of the asset by the enterprise

THE USEFUL LIFE DEPENDS UPON THE FOLLOWING FACTORS:

 Predetermined by legal or contractual limits (lease)
 Depend the number of shifts for which the assets is to be used
 Repairs and maintenance policy of enterprise
 Technological obselesences
 Innovations / improvements in the production method
 Change in demand of output
 Legal or other restriction
 SCRAP VALUE AND DEPRECIABLE
AMOUNT
ESTIMATED RESIDUAL / SCRAP VALUE OF
DEPRECIABLE ASSET:
 It is estimated value of depreciable asset at end of its useful
life
 It Is generally difficult to determine the residual value
 But it is estimated at the time of acquisition , installation and
 At the time of revaluation of the asset

MEANING OF DEPRECIABLE AMOUNT :

a) Historical cost – estimated scrap value
b) Depreciable amount is allocated over the estimated useful
life of depreciable asset
 METHODS OF DEPRECIATION
There are two methods of depreciation which are most commonly employed in
industrial and commercial enterprises. they are as follows:

A. Straight line method (SLM)

B. Written down value method (WDV)

The management uses most appropriate method(s) based on various important factors.
they are

 Type of asset
 Nature of the use of asset
 Circumstances prevailing in the business
 Selected depreciation method should be applied consistently from period to period
 CHANGE IN DEPRECIATION
METHOD
Change in depreciation is done in following
condition

 For compliance of statute

 For compliance of accounting standard
 For more appropriate presentation of the financial
statement
 PROCEDURE TO BE FOLLOWED IN THE
CASE OF CHANGE IN DEPRECIATION

 Depreciation should be recomputed applying the new method from

the date of its acquisition / installation of change in method.
(RETROSPECTIVE METHOD)
 Difference between the total depreciation under the new method
and accumulated depreciation under the old method till the date of
change may be surplus / deficiency
 Such resultant surplus is credited to profit and loss account under
the head ‘Depreciation Written Back a/c’
(or)
 Such resultant deficiency is charged to profit and loss a/c
 Such change of depreciation method should be treated as change in
accounting policy and its effect should be quantified and disclosed
CHANGE IN ESTIMATED USEFUL
LIFE
When there is change in estimated useful life of asset
, outstanding depreciable amount on the date of
change in estimated useful life of asset should be
allocated over the revised remaining useful life of
the asset.
 CHANGE IN HISTORICAL COST
DUE TO EXCHANGE VARIATION ON LONG TERM
FOREIGN LIABILITY. PRICE ADJUSTMENT AND
CHANGE IN DUTIES ETC:
 Increase / decrease amount of historical cost is added / deducted
from the written down value on the date of change
 Depreciation on the revised WDV will be provided
prospectively over remaining life of the asset
DUE TO REVALUATION :
 Depreciation should be charged on the basis of revalued amount
and on the estimate of the remaining useful life of such asset.
DEPRECIATION CHARGED ON ADDITION
OR EXTENSION TO AN EXISTING ASSET
Addition / extension is an integral part of existing asset:
 It is depreciated over the remaining useful life of the existing asset.

Addition / Extension is not an integral par of the existing asset:

 It is depreciated over the estimated useful life of the additional
asset.

WHEN THE DEPRECIABLE ASSET IS DISPOSED OFF,

DISCHARGED , DEMOLISHED OR DESTROYED:
Net Surplus or deficiency (sale proceeds – written down value) is
taken to credit side and debit side of the profit and loss account
respectively.
 DISCLOSURE
 Total cost of each of assets
 Total depreciation for the period of each class of
assets
 Accumulated depreciation of each other of asset
 Depreciation method