About Depreciation accounting and the basics of Depreciation.

1. Depreciation
Accounting

2. Definition
According to accounting standard (AS 6)
“Depreciation is a measure of the wearing out ,
consumption or other loss of value of a depreciable
asset arising from use effluxion of time or
obsolescence through technology and market changes”

3. Definition analysis
Allocation of depreciable amount
of a fixed asset over its estimated
useful life
Depreciation is a non-cash
expense and is charged to Profit &
Loss a/c each year
Depreciation is based on cost of
asset

4. CAUSES
 By contrast
 By expiry of time
 By obsolescene
 By depletion
 Permanent fall in
price
 By abnormal
factors
NEED
 For determination of
net profit or net loss.
 For showing asset
at fair and true value
in the balance sheet.
 Provision of funds
for replacement of
assets.
 Ascertaining
accurate cost of
production.
 Distribution of
dividend out of profit
only.
FACTORS
 Total cost of the
asset.
 Estimated useful
life of the asset.
 Estimated scrap
value.
 Chances to
obsolescene.
 Addition to
assets.
 Legal provision.

5. Causes
INTERNAL CAUSES:
 Wear and tear
 Depletion
EXTERNAL CAUSES:
 ObsolescenceObsolescence
 Passage of timePassage of time
ACCIDENT
PERMANENT FALL IN PRIC

6. Needs
Determination of net profit or net loss.
Showing assets at fair and true value in the
balance sheet.
Provision of funds for replacement of
assets.
Ascertaining accurate cost of production.
Distribution of dividend out of profit only.
Avoiding over payment of income tax.

7. Factors Determining
Depreciation
Original cost of fixed asset i.e., purchase price plus
freight and installation expenses.
Estimated amount of expenditure on repairs during
the useful life.
Estimated useful life of asset after which it will be
discarded.
Estimated residual or scrap value.
Possibility of obsolescence.
Interest on investment-the amount invested on
purchase of asset, if it had been invested in some
other investment what interest would have been
earned.

8. Assessment of Depreciation

9. Methods of Depreciation
1) STRAIGHT LINE METHOD
 Amount of depreciation is fixed.
 Useful to assets whose service remain uniform throughout the year.
For eg: Furniture & fixtures
2) WRITTEN DOWN VALUE METHOD
 Rate of depreciation is fixed.
3) ANNUITY METHOD
 Depreciation is calculated from annuity table.
4) SINKING FUND METHOD
 The amount of depreciation created is invested outside.
5) INSURANCE POLICY METHOD
 Amount of depreciation of each year is paid as an insurance premium.

10. 6) ANNUAL EVALUATION METHOD
7) KILOMETRE METHOD
 Depreciation calculated on the distance run by the transportation means.
8) LABOUR HOUR RATE METHOD
 Depreciation is calculated on the basis of labour hour worked.
9) GLOBAL METHOD
 Depreciation is calculated on the sum of all the assets.
10) PRODUCTION UNIT METHOD
 Mostly used in mines to calculate the depreciation on production.
11) STATUATORY METHOD
 Depreciation value/rate is fixed by this method.

11. Change In Method Of
Depreciation
• Required by statute or law
• Required for compliance with an accounting
standards
• Result in more appropriate preparation and
presentation of financial statement

12. Disclosure in the F.S
a) The depreciation methods used
b) The total depreciation for the period for each
class of assets
c) The gross amount of class of assets and
related accumulated depreciation
d) Other accounting policies ( relevant to
depreciation)
e) The depreciation rates or useful lives of assets
if they are different from principal rates
f) A change in the method of depreciation is
considered as a change in accounting policy

13. Disposal of Depreciation Assets
Important clarification
u/s 350 of Companies
Act 1956
 Depreciation should be charged even if
assets remain idle
 Depreciation should be provided on
immovable assets
 The number of shifts (double or multiple)
for which the assets has been used should
be considered for depreciation
 For depreciation charge , Written Down
Value(WDV)-is suggested though straight

14. CONCLUSION
This Standard applies to all depreciable assets, except the following items
to which special considerations apply:—
(i) forests, plantations and similar regenerative natural resources;
(ii) wasting assets including expenditure on the exploration for and
extraction of minerals, oils, natural gas and similar non regenerative
resources.
(iii) expenditure on research and development;
(iv) goodwill and other intangible assets;
(v) live stock.
This standard also does not apply to land unless it has a limited useful life
for the enterprise.

15. • Depreciation has been provided under written down
value method at the rates prescribed under Schedule
XIV of the Companies Act, 1956.
United Breweries ~ Depreciation

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