Depreciation accounting involves allocating the cost of a fixed asset over its useful life. There are two main depreciation methods - straight-line and written down value. Under straight-line, the same amount is deducted each year, while written down value uses declining percentages based on the asset's reducing value. NGOs debate whether and how to apply depreciation, as the concept was developed for businesses. Accounting for depreciation involves debiting the expense and crediting a capital fund to avoid overstating assets.

1. A c c ou n t A b le
Depreciation Accounting – 1
TM
Issue # 104; Aug-04; Released: Mar - 05
In this issue
What is Depreciation ............................ 1 though due to a different reason. Com-
Depreciation Method ............................ 1 puters grow obsolete very fast.
1. Straight-line Method ................................. 1
2. Written-down Value Method.................... 2 Charging depreciation is a way of e n-
Capital Fund........................................ 3 suring that fixed assets are not shown
1. Out of Project Grant ................................. 3 at an inflated value in the Balance
2. Out of Own Funds .................................... 4 Sheet. The amount of depreciation is
Depreciation since long has been a normally charged to Profit & Loss A c-
disputed is sue amongst NGOs. Some count. Thus, it also helps in creating a
charge depreciation regularly. Others reserve for replacing the assets, when
don’t charge any depreciation. they are worn out.
For NGOs that do charge depreciation, The concept of depreciation has essen-
there are questions about the rates to tially been developed for business en-
be used. Then finally, there is the ques- terprises. Can we apply this concept to
tion of how to account for the deprecia- NGOs also? There is no definite
tion. agreement on this as yet. As stated
earlier, some NGOs charge deprecia-
These two issues of AccountAble 1 deal
tion, others don’t.
with some questions
related to depre-
tion: what is depre- Depreciation Method
ciation, how to calcu- There are two popular methods of de-
late it and finally, how preciating assets. One is called
to account for the de- straight-line method and the other is
preciation that you called reducing balance method. How
are charging. do these work?
1. Straight-line Method
What is Depreciation In this method, the amount of deprecia-
When you buy a fixed asset, it has a tion remains the same through out the
certain life, over which it can be used. life of the asset. For example, if you
After that time, most probably it will estimate the life to be about 28 years,
have to be replaced. then you would divide the cost of the
For example, a thatched roof hut may asset by 28. This will give you the
last for 5-10 years. A building con- amount of depreciation for each year.
structed with RCC2 may last as much Mostly, however, people use standard-
as a hundred years. This happens ised rates for depreciation. Some
mainly because of wear and tear. common depreciation rates under
Some assets may be very short-lived, straight-line method (SLM) are given
below:
1
Issues 104 and 105
2
Reinforced Cement Concrete
Ac c ountAble 104 – 1

2. Category SLM Life following example shows how this is
Rate (years)
done. In this case, the original cost of
the computers is Rs.1,00,000:
3
Buildings 1.63% 58
Year Calculation Deprecia-
Plant and machinery 4.75% 20 tion
Office Equipment 4.75% 1 100,000 x 16.21% 16,210
Cycles 7.07% 2 100,000 x 16.21% 16,210
Motor cars/ motor- 9.5% 3 100,000 x 16.21% 16,210
cycles, scooters
4 100,000 x 16.21% 16,210
Motor buses / motor 11.31%
2. Written-down Value Method
lorries, tractors
In this method, the rate is applied on
Computers 16.21% 6 the net value of the asset. What does
net value mean?
Furniture and fixtures 6.33%
Suppose, the original cost of the com-
Furniture and fixtures 9.5% puters is Rs.1,00,000. In the first year,
used in schools, the depreciation will be calculated u s-
colleges, meeting ing this as a basis. If the rate is 40%,
halls, welfare centres, then the depreciation comes to
etc. Rs.40,000. Net value of the asset will
Fishing boats 10% now be Rs.60,000. Next year, the d e-
preciation will be calculated on this
Inland boats 3.34%
(Rs.60,000), as shown below:
These rates have been taken from the
Year Calculation Deprecia-
Companies Act, 19564.
tion
There is another set of rates available
in the Income Tax Act, 1961. However, 1 100,000 x 40% 40,000
these rates have been designed to give
2 60,000 x 40% 24,000
a financial incentive5 to the assessee.
NGOs do not have to pay income tax. 3 36,000 x 40% 14,400
Therefore, these rates are not as suit-
able for our purpose. 4 21,600 x 40% 8,640
The SLM rate is applied on the original Rate for written-down value (WDV)
cost of the asset each year. The origi- method are higher than those under the
nal cost is also called gross block. The straight-line method. These are given
below:
3
Including roads, culverts, wells, tube-wells
4 Category WDV Life
Schedule XIV
5
In the form of reduced taxable income, by Rate (years)
specifying higher rates for certain items
such as energy-saving devices
Ac c ountAble 104 – 2

3. Lok Jagran Manch Vr.1 1-Apr-05
Category WDV Life
Rate (years) Dr. Furniture A/c - CRY 10,100
Cr. Bank A/c 10,100
6
Buildings 5%
Tables and chairs purchased for meeting hall
from Sh. XYZ
Plant and machinery 13.91%
Office Equipment 13.91% This will be reported as utilisation to
CRY. However, this amount can not be
Cycles 20% shown in the Income & Expenditure
Account, as it is not an expense.
Motor cars/ motor- 25.89%
Where will it be shown then? On the
cycles, scooters
Assets side of the Balance Sheet.
Motor buses / motor 30% Further, for a properly balanced pres-
lorries, tractors entation, a Capital Fund should also be
created on the Liabilities side (Vr. 2):
Computers 40%
Lok Jagran Manch Vr.2 1-Apr-05
Furniture and fixtures 18.1% Dr. Grant A/c - CRY 10,100
Cr. Capital Fund A/c 10,100
Furniture and fixtures 25.88%
used in schools, Transfer of funds against purchase of tables
and chairs from CRY Grant A/c to Capital
colleges, meeting
Fund A/c
halls, welfare centres,
Based on the above two entries, the
etc.
Fishing boats 27.05% Balance Sheet will look like the one
shown below:
Inland boats 10%
Liabilities Rs. Assets Rs.
Capital Fund General Fund 15,000 Furniture 10,100
This question is closely linked with how Capital Fund 10,100 Other assets 15,000
you acquired and accounted for the
fixed assets in the first place. Most of Total 25,100 Total 25,100
the fixed assets are purchased out of What is the purpose in creating the
project grants. Some assets are pur- Capital Fund? Well, if we did not, then
chased from own funds also. In some the Income & Expenditure Account
cases, the assets are d onated to the would show an extra surplus of
NGO. Let us, therefore, look at the ac- Rs.10,100. This would then get trans-
counting entries for these transactions: ferred to the General Fund and be
shown as below:
1. Out of Project Grant
When the assets are purchased, follow- Liabilities Rs. Assets Rs.
ing entry is passed (Vr.1): General Fund 25,100 Furniture 10,100
Other assets 15,000
Total 25,100 Total 25,100
6
Including roads, culverts, wells, tube-wells
Ac c ountAble 104 – 3

4. This presentation may cause confusion Liabilities Rs. Assets Rs.
that so much money is available in the
General Fund for spending on various General Fund 25,100 Furniture 10,100
purposes.
Less: T/f to Other assets 15,000
Therefore, creating a Capital Fund to Capital Fund -10,100
counter-balance the purchase of fxed
i
assets is considered better. Cl. Balance 15,000
2. Out of Own Funds Capital Fund 10,100
When the assets are purchased out of
Total 25,100 Total 25,100
own funds, the same entry is passed as
shown in Voucher 1. However, after Continued in AccountAble 105...
this a question arises. Should we cre-
ate a Capital Fund for these assets What is AccountAble: Each issue of 'Account-
Able' covers a different topic related to NGO
also? After all, these assets have not
regulation or accounting and is mailed to about
been purchased out of a grant. These 2,700 persons in NGOs, Agencies and audit
have been purchased out of General firms. AccountAid encourages reproduction or
Fund. re-distribution of ‘AccountAble’ in workshops or
NGO newsletters for non-commercial use, pro-
Let us see what happens if we do not vided the source is acknowledged.
create a Capital Fund. The Balance
AccountAble in Hindi: Aka%{qebl ihNdI me< ‘leoa-
Sheet will look like the following:
yaeg' ke nam se %plBx hE,
Liabilities Rs. Assets Rs.
Interpretation of law: Interpretation of law
given here is of a general nature. Please consult
General Fund 25,100 Furniture 10,100 your advisors before taking any important deci-
sion.
Other assets 15,000
AccountAble on the Web: All the past issues
of ‘AccountAble’ are available on our web-site
Total 25,100 Total 25,100
www.accountaid.net.
We have already discussed this pres- AccountAid Capsules: Short items of inform a-
entation and how it would cause confu- tion on NGO accounting and related issues. To
sion. subscribe, send e-mail to accountaid-
subscribe@topica.com .
A better alternative would be to create
Questions?: Your questions, comments and
a Capital Fund as below (Vr. 2A): suggestions can be sent to AccountAid I dia,
n
55-B, Pocket C, Siddharth Extension, New
Lok Jagran Manch Vr.2A 1-Apr-05
Delhi-110 014; Phone: 011-2634 3128; Ph./Fax:
Dr. General Fund A/c 10,100 011-2634 6041; e-mail: accountaid@vsnl.com ;
accountaid@gmail.com .
Cr. Capital Fund A/c 10,100
Transfer of funds against purchase of tables © AccountAid™ India iv³m s<vt! 2061 )aLgun,
and chairs from General Fund A/c to Capital March 2005 CE
Fund A/c
Published by AccountAid India, New Delhi;
What would the Balance Sheet look Printed at Chanakya Mudrak Pvt. Ltd., New
Delhi. Ph.: 5142 0316, 2592 7951
like?
For private circulation only.
Ac c ountAble 104 – 4