DEPRECIATION

Submitted by:
Abhilasha
Lovepreet
Parul
Sunira
Tarrunnum
 DEPRECIATION- MEANING
• Depreciation is a permanent, continuing, and gradual
shrinkage in the book value of a fixed asset.
• The Institute of Chartered Accountants of India
defines depreciation as, “a measure of the wearing
out, consumption or other loss of a value of a
depreciable asset arising from use, affluxion of time
or obsolescence through technology and market
changes. Depreciation is allocated so as to charge a
fair proportion of the depreciable amount in each
accounting period during the expected useful life of
the asset”.
 CAUSES OF DEPRECIATION

• Physical depreciation

• Time factor

• Obsolescence
• Accident
 METHODS OF DEPRECIATION

• Fixed installment method

• Written down vale method

• Annuity method
• Machine hour rate method
 FIXED INSTALLMENT METHOD
• This method is also called as original cost or
straight line method.
• Under this method, a fixed percentage of the
original value of the asset is written off every
year so as to reduce the asset account to its
scrap value at the end of the estimated life of
the asset. Here,
• DEPRECIATION = HISTORICAL VALUE – SCRAP VALUE
ESTIMATED LIFE OF AN ASSET
 MERITS

• This method is simple to understand and easy

to apply.
• This method is very suitable for those assets
which have a fixed life e.G. , Furniture, and
other assets of a small intrinsic value.
 DEMERITS
• It becomes difficult to calculate the
depreciation on additions made during a year.
• Under this method the depreciation charge
remain the same from year to year
irrespective of the use of the asset. Thus it
does not take into account the effective
utilisation of the asset.
 QUESTION
On1st January, 1999, machinery was purchased by x
for rs.50,000. On 1st July, 2000, additions were made
to the extent of rs.10,000. On 1st April, 2001, further
additions were made to the extent of rs.6,400.
On 30th june,2002 machinery, the original value of
which was rs.8,000 on 1st january,1999, was sold for
rs.6,000. Depreciation – 10% on SLM method.
Prepare machinery account for four years from 1999-
2002 .
 MACHINERY ACCOUNT
DATE PARTICULARS AMOUNT DATE PARTICULARS AMOUNT
1999 1999
JAN.1 TO BANK 50,000 DEC.31 BY DEPRECIATION 5,000
DEC.31 BY BALANCE C/D 45,000
50,000 50,000
2000 2000
JAN.1 TO BALANCE B/D 45,000 DEC.31 BY DEPRECIATION
JULY 1 TO BANK 10,000 (5,000+ 500) 5,500
DEC.31 BY BALANCE C/D 49,500
55,000 55,000
2001 2001
JAN.1 TO BALANCE B/D 49,500 DEC.31 BY DEPRECIATION
 TO BANK 6,400 (5,000+ 1,000+ 480) 6,480
BY BALANCE C/D 49,420
55,900 55,900
2002 2002
JAN.1 TO BALANCE B/D 49,420 JUNE 30 BY BANK 6,000
TO PROFIT AND 800 DEC.31 BY DEPRECIATION
LOSS ACCOUNT
(4,200+1,000+640+ 6,240
400)
BYBALANCE C/D 37,980
50,220 50,220
 MACHINE HOUR RATE METHOD
• This method is useful in case of machines. The
life of machine is fixed in terms of hours. Hourly
rate of depreciation is worked out by dividing
the cost of machine by the total number of
hours for which the machine is expected to be
used. Depreciation to be written in a year will
be ascertained by multiplying the hourly rate of
depreciation by the number of hours that the
machine actually runs in the year.
 QUESTION
• A machine was acquired on 1st April, 2001 at a
cost of Rs.9000, the cost of installation being
Rs.1000. It is expected that its total life will be
20,000 hours. During 2001 it worked for 1,600
hours and during 2002 for 2,400 hours. Make
machinery account for 2001 and 2002.
DATE PARTICULARS AMOUNT DATE PARTICULARS AMOUNT

2001 2002
April 1 To bank (cost and 10,000 Mar.31 By depreciation 800
installation charges)
Mar.31 By balance c/d 9,200
10,000 10,000
2002 2002
Arpil 1 To balance b/d 9,200 Mar.31 By depreciation 1,200
Mar.31 By balance c/d 8,000
9,200 9,200
 WRITTEN DOWN VALUE METHOD
• Under this method, depreciation is calculated
at a certain percentage each year on the
balance of the asset which is brought forward
from the previous year.
• The amount of depreciation charged in each
period is not fixed but it goes on decreasing
gradually as the beginning balance of asset in
each year will reduce.
• this method is justified in the cases where:
• There is increase in repairs and maintenance
costs consequently decreasing efficiency and
revenue in every succeeding period.
 MERITS

• Fresh calculations of depreciation are not

necessary as and when additions are made.
• This method is recognised by the income tax
authorities in India.
 DEMERITS
• As compared to straight line method, it is
difficult to determine the suitable rate of
depreciation.
• The original cost of the asset is altogether lost
sight of in subsequently years and the asset
can never be reduced to zero.
 QUESTION
• On 1st April, 1999, moon ltd. Purchased a plant for
rs.10,00,000. On 1st october, 1999 an additional
plant was purchased for rs.5,00,000. On 1 st
october,2000,the plant purchased on 1st april,1999
was sold off for rs.4,00,000. On 1st october,2001,a
new plant was purchased for rs.12,00,000 and the
plant purchased on1st october, 1999 was sold for
rs.4,20,000 on the same date.Depreciation – 10% on
wdv on 31st march every year. Prepare plant account
for three years ended 31st march, 2002.
 PLANT ACCOUNT
date particulars amount date particulars amount
1-4-99 To bank (p1) 10,00,000 31-3-00 By depreciation
1-10-99 To bank (p2) 5,00,000 P1- 1,00,000
P2- 25,000 1,25,000
By balance c/d 13,75,000
15,00,000 15,00,000
1-4-00 To balance b/d 13,75,000 1-10-00 By bank 4,00,000
By depreciation(p1) 45,000
By profit and loss 4,55,000
account
31-3-01 By depreciation(p2) 47,500

By balance c/d 4,27,500

13,75,000 13,75,000
1-4-01 To balance b/d 4,27,500 1-10-01 By bank 4,20,000
1-10-01 To bank(p3) 12,00,000 By depreciation(p2) 21,375

To profit and loss 13,875 By depreciation(p3) 60,000

account
By balance c/d 11,40,000
16,41,375 16,41,375
 ANNUITY METHOD
• Under this method, amount spent on the
purchase of an asset is regarded as an
investment which is assumed to earn interest
at a certain rate.
• Every year the asset account is debited with
the amount of interest and credited with the
amount of depreciation. This interest is
calculated on the debit balance of the asset
account at the beginning of the year.
 QUESTION
A firm purchases a 5 years lease for rs.40,000 on
1st January. It decides to write off depreciation
on the annuity method, presuming the rate of
interest to be 5% per annum. The annuity
tables show that a sum of Rs. 9,239 should be
written off every year. Show the lease account
for five years.
DATE PARTICULARS AMOUNT DATE PARTICULARS AMOUNT
Year 1 Year 1
Jan. 1 To bank 40,000 Dec. 31 By depreciation 9,239
To interest 2,000 Dec. 31 By balance c/d 32,761
42,000 42,000
Year 2 Year 2
Jan. 1 To balance b/d 32,761 Dec. 31 By depreciation 9,239
To interest 1,638 Dec. 31 By balance c/d 25,160
34,399 34,399
Year 3 year3
Jan. 1 To balance b/d 25,160 Dec. 31 By depreciation 9,239
To interest 1,258 By balance c/d 17,179
26,418 26,418
Year 4 Year 4
Jan. 1 To balance b/d 17,179 Dec.31 By depreciation 9,239
To interest 859 By balance c/d 8,799
18,038 18,038
Year 5 Year 5
Jan. 1 To balance b/d 8,799 Dec. 31 By depreciation 9,239
To interest 440
9,239 9,239
 CHANGE OF METHOD
Sometimes the method is changed either from
original method to diminishing method or
vice- versa with effect from current year or
with retrospective effect. If the change is from
current year, then there will be no problem
but simply to change the method of
depreciation.
 QUESTION
Abc ltd. Purchased on 1st january,1997
secondhand plant for rs.30,000 and
immediately spent rs.20,000 in overhauling it.
On 1st july,1997 additional machinery of a cost
of rs.25,000 was purchased. On 1st july 1999,
the plant purchased on 1st january,1997
became obsolete and was sold forrs.10,000.
on that date new machinery was purchased
for rs.60,000.
• Depreciation was provided for annually on
december 31 at 10% per annum on original
cost method. In 2000, however, the company
changed this method and adopted written
down value method at a rate of 15%.
• Show the plant and machinery account for the
years 1997-2002.
 Plant and machinery account
date particulars amount date particulars amount
1997 1997
Jan.1 To bank 30,000 Dec.31 By depreciation
To bank 20,000 (5,000+1,250) 6,250
July 1 To bank 25,000 By balance c/d 68,750
75,000 75,000
1998 1998
Jan.1 To balance b/d 68,750 Dec.31 By depreciation 7,500
By balance c/d 61,250
68,750 68,750
1999 1999
Jan.1 To balance b/d 61,250 July 1 By bank 10,000
July 1 To bank 60,000 By depreciation 2,500
 By profit and loss 27,500
account
Dec.31 By depreciation
(2,500+3,000) 5,500
By balance c/d 75,750
1,21,250 1,21,250
2000 2000
Jan.1 To balance b/d 75,750 dec.31 By depreciation
(15% of 75,750) 11,363
By balance c/d 64,387
75,750 75,750
2001 2001
Jan.1 To balance b/d 64,387 Dec.31 By depreciation 9,658
By balance c/d 54,729
 64,387 64,387
2002 2002
Jan 1 To balance b/d 54,729 Dec.31 By depreciation 8,209
By balance c/d 46,520
54,729 54,729
THANK YOU