DEPRECIATIONPRESENTED BY :-

1) NIKHIL MHATRE

2) ROSHAN TUPE

What does Depreciation means….? The word depreciation has derived from

Latin word ‘Depretium’ which means “decline "or “reduction "in price or value.Depreciation is concerned with fixed assets only. Fixed assets have Long life and loose their value due to usages. Even if the asset is not put to use, its value goes on reducing due to time span.

In Simple Words :-

a reduction in the value of an asset overtime, due to particular wear and tear.

Assets which gets Depreciated…?

1) Machinery

2) Furniture

3) Vehicles

4) All Electronics Items use for Business purpose

Objectives of Depreciation

To calculate proper profits. To show the asset at its reasonable value. To maintain the original monetary investment

of the asset intact. Provision of depreciation results in some

incidental advantages also. To provide for replacement of an asset. Depreciation is permitted to be deducted from

profits for tax purposes.

Causes of Depreciation .Internal causes : wear and tear, disuse, maintenance, change in

production, restriction of production, reduced demand, technical progress & depletion.

.External causes : obsolescence and efflux ion of time

Method of Depreciation

DepreciationStraight Line Method

Written Down Value

Method

Sum of the Years’ Digits

Method

Units of Production

Method

Double Declining Balance Method Appraisal

Method

Sinking Fund

Method

Annuity Method

Insurance Policy

Method

Straight Line Method This Method is also known as “Fixed instalment Method” or

“Original Cost Method”.

Under this method depreciation is calculated every year on the original cost of the Asset (Cost = Purchase price + All expenses) incurred till the asset is put in the form of use.eg. Transportation, Octroi, Duties & Installation charges..

Formula :-

Depreciation = Original Cost X Rate of Depreciation X Period

Example:-

M/s Manoj P.Ltd purchased a Machinery on 1st Oct 2011 at Rs.90,000 and Spent Rs.10,000 on its installation. The firm provide depreciation at 10% p.a. under Straight Line Method on 31st March every year.Show Machinery Account for 2011-12, 2012-13.

In the books of M/s Manoj P.Ltd

Dr. Machinery Account Cr.

Date Particulars J.F Amt   Date Particulars J.F Amt

2011 2012      

Oct.1 To Bank A/c (Machinery)   90,000   Mar.31 By Depreciation A/c

Dep.1,00,000 X 10% X 6 12

  5,000

Oct.1 To Bank A/c (Installation)   10,000   Mar.31 By Balance c/d   95,000

      1,00,000 1,00,000

2012 2013      

Apr.1 To Balance b/d   95,000   Mar.31 By Depreciation A/c

Dep.1,00,000 X 10% X 12 12

  10,000

          Mar.31 By Balance c/d   85,000

      95,000 95,000

2013                

Apr.1 To Balance b/d   85,000          

                 

Advantages & Disadvantages

of Straight line methodAdvantages:

Simple, easy to understand and to applyIt provides uniform charge every yearIt’s calculated on original cost over the life time

Disadvantages:Depreciation is not related to the usage factor

It ignores the fact that in the later years of the life of the asset, efficiency of the asset declines.

Loss of interest on investment in the asset is not accounted for…

Written Down Value Method This Method is also known as “Reducing Balance Method” or

“Diminishing Balance Method”.

Under this method depreciation is calculated on the written down value (i.e opening balance of every year) of the asset. Under this method, the amount of depreciation keeps on declining every year..

Example:-

M/s Prajakta & Son’s purchased a Machinery on 1st Oct 2011 at Rs.90,000 and Spent Rs.10,000 on its installation. The firm provide depreciation at 10% p.a. under Written Down Value Method on 31st March every year.Show Machinery Account for 2011-12, 2012-13.

In the books of M/s Prajakta & Son's

Dr. Machinery Account Cr.

Date Particulars J.F Amt   Date Particulars J.F Amt

2011 2012      

Oct.1 To Bank A/c (Machinery)   90,000   Mar.31 By Depreciation A/c

Dep.1,00,000 X 10% X 6 12

  5,000

Oct.1 To Bank A/c (Installation)   10,000   Mar.31 By Balance c/d   95,000

      1,00,000 1,00,000

2012 2013      

Apr.1 To Balance b/d   95,000   Mar.31 By Depreciation A/c

Dep.95,000 X 10% X 12 12

  9,500

          Mar.31 By Balance c/d   85,500

      95,000 95,000

2013                

Apr.1 To Balance b/d   85,500          

                 

Advantages & Disadvantages

of Written down value methodAdvantages:

It’s a simple method of providing depreciation as a fixed rate is applied on book-value or written down value of assets.

This method is quite popularIt provides uniform charge for charge for services of the asset

through out the life

Disadvantages:The method is slightly complicatedIf the asset has no residual value, it is very difficult to calculate

the rate.

THANK YOU,