This document discusses depreciation and its key aspects. It defines depreciation as the decline in value of fixed assets like machinery, buildings, vehicles, and furniture due to constant use, time, or obsolescence. Depreciation is a non-cash expense that is allocated over the useful life of the asset to determine accurate profit/loss and financial position. Common depreciation methods include straight line and written down value, which calculate expense differently but both aim to fully write off the asset's value by the end of its life.

2. DEPRECIATION
 In every business, there are certain assets
of a fixed nature that are needed for the
conduct of the business.
 Depreciation is the fall in the value of
those fixed asset either with their usage or
with affix of time.
 Examples (fixed assets): plant &
machinery, building, motor vehicles,
furniture, etc.

3. SPECIAL FEATURES OF
DEPRECIATION
 Depreciation is the decline in the value of fixed
assets (except land).
 This fall is of permanent nature. Once the value
of asset is declined, it can not be restored.
 Depreciation is a gradual and continuing
process because the value of assets will
decline either by their constant use or
obsolescence or due to expiry of time.

4. SPECIAL FEATURES OF
DEPRECIATION
 It is not the process of valuation of assets but
process of allocation of the cost of an asset to
its effective span of life.
 It only decreases the book value of assets,
not the market value.
 This term is only used in respect of the
tangible assets.
 It is a non – cash expense. It does not involve
any cash outflow.

5. CAUSES OF
DEPRECIATION
 BY CONSTANT USE: Due to the constant use of
fixed assets in business operations wear and tear
arise in them which results in the reduction of their
values.
 BY EXPIRY OF TIME: the value of many assets
decreases with the passage of time even if they
are not being used. Natural forces like rain,
winds, etc. contribute in diminish of an asset.
 BY OBSOLESCENCE: sometimes, due to new
inventions and improved techniques the old asset
becomes useless even if it is alright.

6. CAUSES OF
DEPRECIATION
 BY ACCIDENT: Sometimes a machine may be
destroyed due to fire, earthquake, flood, etc. or a
vehicle may be damaged due to accident.
 BY DEPLETION: Depletion is the decrease in the
value of wasting assets such as mines, oil-wells, etc.
due to their constant working.
 BY PERMANENT FALL IN THE MARKET PRICE: the
fluctuation in the market value of fixed assets are not
recorded because such assets are not meant for
resale. Sometimes, fall in value of fixed assets is
treated as depreciation like permanent fall in value of
investment.

7. IMPORTANCE OF
DEPRECIATION
 For Ascertaining the True Profit or Loss: The true
profit can be ascertained only when all the costs incurred
for earning revenue is debited to the profit and loss
account. As the assets are also used in earning
revenues, the depreciation is also an expense.
 For showing ‘True and Fair View’ of the Financial
Position: If the depreciation is charged, the assets will
be shown in the balance sheet at an amount which is
more than their true values. So, balance sheet will not
give the true view of financial position.
 To Ascertain the Accurate Cost of Production: As
depreciation is also an expense, the cost of production
can not be calculated without taking it into consideration.

8. IMPORTANCE OF
DEPRECIATION
 To Provide Funds for Replacement of Assets:
Depreciation though debited to profit & loss
account, is not paid in cash. Hence, the amount of
depreciation is retained in the business and later on
used in the replacement of fixed assets.
 To Prevent the Distribution of Profits out of
Capital: If depreciation is not charged, the profit
shown by profit & loss account will be more than the
actual and this profit will be then either taken by
proprietor or distributed as dividend.
 Other Objectives: As the profit shown will exceed
the actual profits, the employees may demand
bonus or increase in wage, we will also have to pay
more income tax.

9. FACTORS DETERMINING THE
AMOUNT OF DEPRICIATION
 TOTAL COST OF THE ASSETS: The cost of a fixed
assets is determined after adding all expenses incurred
for bringing the asset to usable condition, such as
freight, transit insurance and installation costs, etc.
 ESTIMATED USEFUL LIFE OF ASSETS: Useful life of
an asset is estimated in terms of number of years.
Example: if a machine can work for 20 years but due to
improvement in technology it will be useful for 15 years
then its life will be considered 15 years.
 ESTIMATED SCRAP VALUE: It is the estimated sale
value of asset at the end of its useful life. It is also
known as residual or breakup value.

10. CALCULATION OF
DEPRECIATION
 EXAMPLE: If a machine is purchased for
Rs.60,000 and Rs.4,000 are spent on freight and
Rs.1,000for installation. It is estimated that it’s
useful for next 10 years and the scrap value at the
end of useful life will be Rs.8,000. Then,
Depreciation will calculated as:
Cost of machine + Freight charges + Installation
Charges – Scrap value = Depreciation
Depreciation = 60,000+4,000+1,000–8,000 ÷ 10
Depreciation = 57,000 ÷ 10
Depreciation = 5,700 (To be charged every year)

11. METHODS OF PROVIDING
DEPRECIATION
Some of the methods used for providing
depreciation are :
 Straight Line Method
 Written Down Value Method
 Annuity Method
 Depreciation Fund Method
 Insurance Policy Method
 Revaluation Method
 Depletion Method
 Machine Hour Rate Method
(First two methods are further explained)

12. STRAIGHT LINE METHOD
 This method is also know as ‘Original Cost
Method’ because under this method
depreciation is charged at a fixed percentage
on the original cost of the asset. The amount of
depreciation remains equal from year to
year. This method is also know as ‘Equal
Installment Method’ or ‘Fixed Installment
Method’. At the end of estimated life, the value
of asset will become zero.

13. Formula and example
(Straight line method)
 Formula:
𝐷𝑒𝑝𝑟𝑖𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 −𝑠𝑐𝑟𝑎𝑝 𝑣𝑎𝑙𝑢𝑒
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡
 Example: Original cost of an asset is 1,00,000Rs with
a scrap value of 15,000Rs and estimated life of 10
years then depreciation…?
Depriciation =
1,00,000 −15,000
10
Depreciation =
85,000
10
= 8,500 Rs (per year)

14. Some Merits of Straight
Line Method
 Simple Method: calculation of depreciation under
this method is very simple so this method is also
widely popular.
 Depreciation burden is equal: under this method
depreciation is charged same every year. Hence,
burden on P&L is equal every year.
 Assets are completely written off: here, the value
of asset can be reduced to zero which is not
possible in some other methods.

15. WRITTEN DOWN VALUE
METHOD
 Under this method, as the value of asset
goes on diminishing, the amount of
depreciation also goes on declining.
 This method is also known as Diminishing
Balance Method OR Reducing Installment
Method.

16. Formula and example (written
down value method)
 Formula
=
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 𝑎𝑡 𝑡ℎ𝑒 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑦𝑒𝑎𝑟 −𝑠𝑐𝑟𝑎𝑝 𝑣𝑎𝑙𝑢𝑒
𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡
 Example: A machine is purchased for 10,000Rs. and
rate of depreciation is 10%.
1st year =
10
100
×10,000 = 1,000Rs. (depreciation)
Now value of machine is 10,000 – 1,000 = 9,000Rs.
2nd year =
10
100
×9,000 = 900Rs. (depreciation)
Now value of machine is 9,000 – 900 = 8,100Rs.

17. Merits of written down value
method
 Easy Calculation: Calculation of depreciation under
this method is somewhat easy as compared to
some other methods.
 Equal Charge Against Income: In this method, the
burden of depreciation and repair charges remains
almost constant every year because when the asset
is new the depreciation is more and repair charges
are less and as the asset goes older with time, the
amount of depreciation decreases and repair
charges increases.

18. Merits of written down value
method
 No Undue Pressure In Later Years: A machine is more
efficient and useful in its earlier years than later years,
according to which the depreciation in earlier year
should be more than later. This method ensure this
point also.
 Value Is Never Reduced To Zero: Here, depreciation is
charged till the asset remains in use even if the
amount is very small.
 Approved By Income Tax Authorities: This method is
permissible under Income Tax Regulations.

19. Thank you