Depreciation Presentation

8/3/2019 Depreciation Presentation

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DEPRECIATION


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WHAT IS DEPRECIATION

The Accounting process of gradually converting theunexpired costs of fixed assets into expenses over a

series of accounting period is called DEPRECIATION.


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Contd.

The acquisition cost of an asset which means the

price paid to acquire or buy it is capitalised (means

that it is not charged immediately as cost against

revenue in the profit and loss account) as per costconvention.

Instead it is carried forward as FIXED

ASSET in the BALANCE SH

EET.


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Contd.

Because it is regarded as a pre-payment for the

services to be enjoyed by the concern. Therefore it

is to be written off as an expense during its useful

life. i.e. A portion of the cost should be chargedagainst profit as an expense in each of the

accounting periods in which the asset is gainfully

used.


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Contd

Though depreciation is the measure of

reduction in the use value of an asset, it does not

refer to the decrease in its market value.

Therefore Depreciation is the process

of allocating the cost of a fixed asset over its

estimated useful life in a rational and systematicmanner.


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Important Terms

The following are some of the important terms to be

known regarding depreciation.

i) DEPRECIABLE ASSETS :-

The assets whose lifetime can be estimated

and useful during two or more accounting periods

in production or service activities of anorganisation is called as depreciable assets can

also called as FIXED ASSETS.


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Important terms contd.

ii) USEFUL LIFE :-

It is the time during which the asset is helpful in

the normal business activities of a firm. It can be less

than the total life time of the asset. It can be

exactly pre-determined or it should be estimated on

reasonable basis.


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Important terms contd

iii) REALISABLE VALUE:-

This is the amount realisable at the end of the

assets useful life either as scrap or as second hand

asset.

iv) EFFLUXION OF TIME:-

It is the passage of time irrespective of actual

use of an asset as in the case of based assets.v) OBSOLESCENCE:-

It refers to an asset becoming out of date

due to improved models or methods.


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Objectives

i) ASCERTAINMENT OF TRUE PROFITS :-

To find out net profit or net loss , we add the

revenues and deduct all the expenses incurred in

that period so the portion of cost i.e. depreciation

is charged.

ii) PRESENTATION OF TRUE FINANCIAL POSITION:-

Unless depreciation is charged assetsmay be overstated in the balance sheet.


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Objectives contd

iii) REPLACEMENT :-

A continous decline in the value of asset over

several years may lead to a decision to replace the

asset. If depreciation is not provided the whole of

the profit may be withdrawn during the life of the

asset.


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Factors affecting the amount of

depreciation

i) Original cost of the asset :-

Invoice price (-) any trade discounts (+)

cost essential to bring the asset to a useable

condition such as freight, insurance, installation

charges.


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Factors contd.

iii) Estimated life :-

An asset may exist physically but it may

not be capable of producing goods at a

reasonable cost. Life of the asset can be estimated

in terms of year, months, hours, units of output or by

other operating measures such as kilometers in case

of trucks, taxies e.t.c.


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Methods of Depreciation

i) Straight line method.

ii) Written down value.

iii)

Annuity method.iv) Depreciation fund method.

v) Insurance policy method.

vi) Sum of digits method.

vii) Depletion method.

viii) Revaluation method.

ix) Machine hour rate method.

x) Repairs provision method.


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Rate of depreciation

The rate of depreciation is the reciprocal of the

estimated useful life. If the useful life of an asset is

10 years, the depreciation rate will be 1/10 or

10%.


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WDV method contd..

The maximum loss of an asset occurs in the early of

use. Therefore this method assumes that an asset

should be depreciated more in the earlier years of

use than later years.

Formula :

rate of deprn

Sum :


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DEPRECIATION FUND METHOD.

It is otherwise called as sinking fund method.

The amount of annual depreciation is investedoutside the business every year in good securities

bearing interest at a specified rate. The process of investing the amount of depreciation

together with the interest received goes on till thetime of replacement of assets.

At this time of replacement, all the securities aresold out and with cash received, the new asset ispurchased.


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INSURANCE POLICY METHOD.

It is otherwise called as Capital Redemption Policymethod.

Cash which is equal to the amount of depreciation, is

paid by way of premium every year. The amount goes on accumulating with the insurance

company at a certain rate of interest and is paid backto the insured at the maturity of the policy.

The main advantage of this method is that the companyneed not worry whether the investments as thedepreciation fund method, will be sold at best price ornot.


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SUM OF DIGITS METHOD.

Under this method, the amount of depreciation to

be written off each year is calculated by the

following formula:

=Remaining Life of the Asset(including the current

year)/ sum of all digits of the life of the assets in

years X cost of the asset.

This method is similar to Written down valuemethod.


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REVALUATION METHOD.

This method is used only in case of small items like

cattle(Livestock), or loose tools where it may be too

much to maintain an account of each single item.

The amount of depreciation to be written off is

determined by comparing the value at the end ofthe year with the beginning of the accounting

period.


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REVALUATION METHOD.(CONTD)

For eg.

Suppose on 1st April 2009, the value of loose tools

was Rs 10000 and during the year Rs 30000 worth

of tools were purchased. Now if in the end of the

year ie 31st March 2010, the loose tools are

considered to be worth only RS 20000 then the

depreciation amount comes to

Rs 10000+ RS 30000 RS 20000 = Rs 20000


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DEPLETION METHOD.

This method is used in case of natural resources like

mines, quarries etc, where an estimate of total

quantity of output likely to be available should beavailable.

Depreciation is caluculated per ton of output.


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MACHINE HOUR RATE METHOD.

This is more or less like the depreciation method.

Instead of the usual method of estimating the life of

a machine in years, it is estimated in hours.

Then, an accurate record is kept recording the

number of hours each machine runs and thedepreciation is calculated accordingly.


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MACHINE HOUR RATE

METHOD.(CONTD)

For eg.

Suppose the effective life of a machine may be 30,000

hours and the cost of machine is RS 4,50,000 then the

hourly depreciation is calculated as follows= 4,50,000/30,000

= RS 15.

The depreciation for a particular year during whichthe machine runs for 2,500 hours will be

2,500 X Rs 15 = RS 37,500


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REPAIRS PROVISION METHOD.

Under this method to the cost of the asset(less its

estimated scrap value), the amount expected to be

spent on its repairs and maintenance throughout itslife should be added and the sum is divided by its

estimated life.


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CHANGES IN METHOD OF

DEPRECIATION.

Accounting Standard 6 stated that the method

selected should be applied consistently from period

to period.

A change from one method of providingdepreciation to another should be made only if the

adoption of the new method is required by statue

or if it were considered that the change would result

in a more appropriate preparation of the financial

statements of the enterprise.


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CHANGES IN METHOD OF

DEPRECIATION.(CONTD)

When such a change in the method of deprecaiton

is made, depreciation should be recalculated in

accordance with the new method from the date ofthe asset coming into use.

The deficiency or surplus arising from recomputation

should be adjusted in the accounts in the year inwhich the method of depreciation is changed.


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THANK YOU.

Documents

Depreciation Presentation