The document discusses various aspects of depreciation accounting including:
1) Depreciation refers to allocating the cost of a tangible asset over its useful life and represents how much of an asset's value has been used. Depreciating assets helps companies earn revenue from an asset while expensing its cost each year.
2) Basic features of depreciation include that it is only used for fixed assets, is a charge against profit, differs from maintenance, and land and antiques are exceptions.
3) Amortization refers to writing off intangible assets over their useful lives, while depletion refers to removing non-renewable resources like coal or oil from reserves.
4) Objectives of
The document discusses various aspects of depreciation accounting including:
1) Depreciation refers to allocating the cost of a tangible asset over its useful life and represents how much of an asset's value has been used. Depreciating assets helps companies earn revenue from an asset while expensing its cost each year.
2) Basic features of depreciation include that it is only used for fixed assets, is a charge against profit, differs from maintenance, and land and antiques are exceptions.
3) Amortization refers to writing off intangible assets over their useful lives, while depletion refers to removing non-renewable resources like coal or oil from reserves.
4) Objectives of
The document discusses various aspects of depreciation accounting including:
1) Depreciation refers to allocating the cost of a tangible asset over its useful life and represents how much of an asset's value has been used. Depreciating assets helps companies earn revenue from an asset while expensing its cost each year.
2) Basic features of depreciation include that it is only used for fixed assets, is a charge against profit, differs from maintenance, and land and antiques are exceptions.
3) Amortization refers to writing off intangible assets over their useful lives, while depletion refers to removing non-renewable resources like coal or oil from reserves.
4) Objectives of
• Depreciation is the permanent and continuing diminution in the quality,
quantity, or value of an asset. or • The term depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life or life expectancy. Depreciation represents how much of an asset's value has been used. • Depreciating assets helps companies earn revenue from an asset while expensing a portion of its cost each year the asset is in use. Not accounting for depreciation can greatly affect a company’s profits. Companies can also depreciate long-term assets for both tax and accounting purposes. Basic Features of Depreciation • The term ‘Depreciation’ used only in respect of fixed assets. • Depreciation is charge against profit. • Depreciation is different from maintenance. • Land and Antiques are the exception for Depreciation. Amortization and Depletion • Amortization- the process of written off intangible assets is termed as amortization. Some intangible assets like patents, copyrights, have a limited useful life. Hence, their cost must be written off over such period. • Depletion- Depletion implies removal of an available but irreplaceable resources such as extracting coal from a coal mine or oil out of an oil well. Objective of provision Depreciation • Ascertainment of True profit • Presentation of true financial position • Replacement of assets • Deduction from income tax • Legal compulsion- no co. can declare dividend for the year, unless depreciation has been provided on fixed assets. • Other reasons- if dep. Has not been provided on assets, profit will be overstated and it will require payment of high dividends, more bonus, higher taxes and higher wages which will be against the business conditions. Methods of recording depreciation When a provision for depreciation account is maintained Methods of recording depreciation When a provision for depreciation account is not maintained Method of Depreciation Straight line method (SLM)
i. This method is also known as 'original cost method'
ii.Under this method, depreciation is charged at fixed percentage on the original cost of the asset, throughout its estimated life. iii.Under this method the amount of depreciation is uniform from year to year. That is why this method is also known as 'Fixed Installment Method' or 'Equal installment method'. iv.The annual amount of depreciation can be easily calculated by the following formula : Annual Depreciation = Original cost - Estimated scrap value Estimated life Question no. 1 • Anurag purchased a machine on 1st April 2016 for 24100 and spent Rs. 900 on its installation. The working life of assets is 10 years. The salvage value of the machine is Rs. 1000. the account are closed on 31st of March each year. Prepare Machine account and Depreciation Account by fixed instalment method for first four years in the books of Anurag. Method of Depreciation Diminishing balance method
• Under this method, depreciation is charged as a fixed percentage on
the book value of the asset every year. In first year the depreciation will be charged at the end of the year, on the total cost of the asset. • Hence, in this method, rate of depreciation is same but amount of depreciation goes on decreasing every year. Therefore, this method is also known as 'written Down Value Method' and 'Reducing Installment Method'. Example