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Depreciation Accounting
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Amortization
View capital asset as bundle of services Similar to prepaid expenses, cost is
expensed as company benefits from the services Land - no depreciation Plant and equipment - depreciation Natural resources - depletion Intangible assets - amortization
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Depreciation Methods
Straight line method (original cost - residual value) /service life
Accelerated methods Declining balance methods Sum of the years’ or years’ digits methods
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Declining Balance Method
Depreciation = book value * depreciation rate. Double declining balance method = book
value * 2 * straight line rate. Straight line rate = 1/(life of asset in years).
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Depreciation Methods
Commonly employed method includes..,• Straightline method• Reducing balance method
Factors in selection of method..,• Type of asset• Nature of use of such asset• Circumstances prevailing in business
Applied consistently to provide comparability Combination of more than method is sometimes used Depreciable assets which do not have material value,
depreciation is often allocated fully in accounting period in which they are acquired
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Changing Depreciation Method
Is treated as as a change in an accounting policy
Change in method is allowed if..,• Its required by statute• Compliance with an AS• Results in more appropriate preparation and presentation
of financial statements
On change in method• Depreciation is calculated using new method from the date
of asset coming into use• Deficiency or surplus on change need to be adjusted
during the year of change [charged to P&L statement]
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Components of Cost
Purchase price Import duties Non-refundable taxes or levies Directly attributable cost in bringing the asset to its working
condition..,• Site preparation• Initial delivery and handling costs• Installation costs – special foundations for plant• Professional fees – architect fees or engineers fees
Deduct trade discount and rebates from purchase price Commissioning cost.., Expenditure on test runs Expenditure on experimental production
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Components of Cost
Costs may undergo changes subsequent to acquisition due to..,• Exchange fluctuations• Price adjustments• Changes in duties or similar factors
Administration and general overheads expenses are excluded Any specific direct admin and OH expenses related to making
the asset workable is included Expenses during prolonged period between installation and
commercial start up • Will be charged to P&L statements• Treated as deferred revenue expenditure amortized over a period not
exceeding 3 to 5 years after commencement of commercial production