Professional Documents
Culture Documents
Objectives
Meaning Why Depreciation Accounting/Why it is to be accounted Methods of Depreciation Accounting
Depreciation
Reduction in value of asset due to its use, wear and tear or obsolescence
Causes of depreciation
Wear and tear Exhaustion eg. Mineral and Mines Obsolescence Effluence of time Accident -
Features
All fixed asset Charge against profit Percentage of depreciation differ from asset to asset as per various law also Some asset may not have any depreciation
Depreciation Vs Depletion
Depreciation Accounting
Rational and systematic distribution of cost over the estimated useful life of the asset
How to fix
Cost of the asset Type of the asset Useful Life Scrap value
Methods of Depreciation
Uniform Charge Method Declining Charge or Accelerated Depreciation Other Methods
Declining or accelerated
Diminishing Balance Method Sum of Years Digit Method Double Declining Method
Other Methods
Group Depreciation Method Inventory System of Depreciation Annuity Method Depreciation Fund Method Insurance Policy Method
and Disadvantages
Simple and Easy Value of the asset can be reduced to zero (except scrap value) More suitable if life can be predicted more accurately eg. Patents, leasehold properties Disadvantages Effective utilization is not considered/ Not based on the use Total charge for the use of the asset is increasing even if asset is used uniformly Not matching with asset value
Journal Entries
Depreciation a\c Dr To Fixed Asset (when Depreciation is Charged)
P & L Account Dr. To Depreciation a\c (When Depreciation a\c is closed and transferred to P&L a\c)
Merits
Dep is based on effective utilization Exact cost can be calculated Demerits Correct estimation of the output may not be practical
Based on the use (in hours) of the machine and total running time available
Dep (per hour) = Cost of the Asset Scrap value Life of the Asset in Hours Dep = Dep per hour X No. of hrs machine used Merits Dep is based on utilization
Eg.
Eg.