DEPRECIATION ACCOUNTING

INTRODUCTION: Depreciation means reduction in the value of fixed assets due its wear and tear. Depreciation is charged on fixed assets only and it is termed as loss to the business. Depreciation is also termed as provision for the replacement of asset at the end of its useful life. FEATURES OF DEPRECIATION :
1. It is charged on fixed asset only. 2. It is a gradual process.

3. It is a permanent decrease in the value of fixed asset. 4. It takes place continuously. 5. It is basically a fall in the value of depreciable fixed asset. METHODS OF CHARGING DEPRECIATION : (A)Fixed Installment Method - It is also known as Straight Line Method or Original Cost Method. Under this method every year durind the useful life of asset, depreciation is calculated as certain fixed percentage of original cost of asset. In this method annual installement of depreciation can also be calculated by the following formula >> Depreciation per annum= Cost of fixed asset – scrap value of asset Estimated useful life

Practice Problems :
1. Arya Ltd. purchased machinery worth Rs. 7000 and spent Rs. 3000 for erection and

installation on 1st Jan 2003. On 1st July 2004 they purchased another machinery worth Rs.5000. Depreciation is to be charged at 10% p.a. on every 31st of Dec under Fixed Installment Method (FIM). Prepare Machinery A/C and Depreciation A/C from the year 2003 to 2005.

using SLM.50000.a. on every 31st Dec under Fixed Installment Method.25000 for erection and installation on 1st July 2002.Prepare Machinery A/C for the year ended 30th June2003. 30000 on 1/7/00. On 30th June 2005 the machinery purchased on 1st July 2002 is disposed off for Rs. Show Machinery A/C for the years 2006-07.a.50000. 2002. Brief Ltd.160000.75000 and spent Rs.2007. 50000. paid customs duty and freight Rs. 100000 was purchased on April. 2004 and 2005. purchased machinery worth Rs.2. on every 31st Dec under Fixed Installment Method. Depreciation is to be charged at 10%p.80000 and incurred erection charges rs. Provision for Depreciation and Depreciation A/C from the year 2004 to 2006. Prepare Machinery A/C and Depreciation A/C from the year 2004 to 2006. M/S Ajay traders purchased furniture costing Rs.25000 for erection and installation on 1st Jan 2004. Almondz Ltd.a. 5. 6. On 1st July 2005 they purchased another machine worth Rs. 100000. 2007-08 and 2008-09. 125000 and spent Rs. Furniture on 1/7/00 was sold for Rs. On 1st July 2003 they purchased another machine worth Rs.a.a. . Another local machinery costing Rs. purchased machinery worth Rs. Prepare furniture account for the year ended 31st March 2001.60000. 34800. On 1st Oct 2008. purchased machinery worth Rs. M/S Ekta Pharmaceuticals imported a machine on 1st Oct 2006 for Rs. They purchased additional furniture of Rs.15000 on 1/4/01. 700000 and spent Rs.50000 for erection and installation on 1st Jan 2004. Dolphin Ltd.500000. on 31st March every year under straight line method.25000 on 31/3/02. Prepare Machinery A/C . On 1st July 2005 they purchased another machine worth Rs. Depreciation is to be charged at 10% p. 4. 3. a portion of the imported machinery (value one third) got out of order and was sold for Rs. It was decided to depreciate it @10% p. on every 31st of Dec under (FIM). Depreciation is to be charged at 12%p.Another machinery was purchased to replace the same for Rs. Depreciation is to be calculated at 20% p.

On 1st July 2007 they purchased another machine worth Rs50000.50000 on 31st Dec 2003. 325000 and spent rs.a.55000 on 1st Jan 2001 and started depreciating it @20%p. Provision for Depreciation and Depreciation A/C from the year 2005 to 2007. 2002.45000. On 1st July 2002 it purchased additional furniture for Rs. Equipments purchased on 1st July 2000 were sold for Rs. It was decided to depreciate it @15% on 31st March every year under Reducing Balance Method.7500 and spent Rs. on every 31st of Dec under Reducing Balance Method. 2. Depreciation is to be charged at 10%p. On 1st October 2006 they purchased another machine worth Rs. Marshall Ltd.a. purchased furniture of Rs. Bold Trading Co. Two computers purchased on 1st Jan 2001 were sold for Rs.25000 for installation on 1st Jan 2005. on RBM on every 31st March. purchased machinery worth Rs. 4. Under this method depreciation is charged at a certain percentage on original cost in the first year and subsequently on opening written down value of an asset every year. Practice Problems : 1. Altaf Trading Co.25000 for installation on 1st Jan 2005.15000. Due to this an amount of depreciation changes every year and it goes on reducing.300000 on 1st July 2000. purchased machinery worth Rs. 160000 on 31/3/02.175000. on RBM on every 31st Dec.55000 on 1st April 2001 and started depreciating it @5%p. They purchased additional equipment of Rs. 5.a.(B)Reducing Balance Method – It is also known as Diminishing Balance Method or Written Down Value Method. Prepare Machinery A/c and Depreciation A/C from the year 2005 to 2007. Brahma Ltd.150000 on 1st April 2001. 3. on every 31st of Dec under (RBM). Depreciation is to be charged at 8% p. On 1st July 2002 it purchased additional computer for Rs. . Prepare Machinery A/c.Prepare Computer A/C for 3years from the beginning. China Enterprise purchased equipments costing rs.a. Prepare Furniture A/C for 3years from the beginning. purchased 5 Computers of Rs. Prepare Equipment A/C and Depreciation A/C for the year ended 31st March 2001.

purchased on July 2006 machinery costing Rs. Charging depreciation on asset Depreciation A/C Fixed Asset A/C Dr To . On 1st April 2008. Transactions Purchase of fixed asset for cash Fixed asset A/C Cash/Bank A/C Fixed asset A/C Party’s A/C Journal Entry Dr To 2.6. etc Cash A/C Dr To 4. on WDV. Journal Entries for Depreciation : No. 30000. one third the machinery which was installed on 1st July 2006 became obsolete and was sold for Rs. 2000 and on 1st Oct 2007 costing Rs. Payment of incidental charges like installation Fixed asset A/C or erection charges. 3000. Show Machinery A/C charging depreciation @10%p. It further purchased machinery on 1st Jan 2007 costing Rs. 10000. 1. A company whose accounting year ends on 31st March. Purchase of fixed asset on credit Dr To 3.a.

Transferring depreciation to profit and loss account Profit and Loss A/C Depreciation A/C Dr To 6.5. Sale of fixed asset (at Loss) Cash A/c Fixed Asset A/C and Loss A/C (Loss) Dr To To Profit Proforma of Fixed Asset Account : Fixed Asset A/C Date Particulars To Balance b/d To Cash/Bank To P & L(profit on sale or change of method) J/F Amt xx xx xx Date Particulars By Depreciation By Cash/Bank (Sale of Asset) By P & L (loss on sale or change of method) By Balance c/d J/F Amt xx xx xx xx xx xx . Sale of fixed asset (at WDV) Cash A/c Fixed Asset A/C Dr To 7. Sale of fixed asset (at Profit) Cash A/c Fixed Asset A/C and Loss A/C (Profit) Dr To To Profit 8.

To Balance b/d Proforma of Depreciation Account: xxx xxx Depreciation A/C Date Year1 Particulars To Fixed Asset J/F Amt xx xx Year2 To Fixed Asset xx xx Year3 To Fixed Asset xx xx Year3 By P & L Year2 By P & L Date Year1 Particulars By P & L J/F Amt xx xx xx xx xx xx .