Prepared & Presented

By
Saswat Mishra
 DEPRECIATON ( AS- 6 )
• Depreciation refers to devaluation in the value of fixed
assets, used in operations over the definite period of time
due to continuous use, wear & tear, decay, obsolescence,
replacement, breakdown, fall in market value, etc.
• Depreciation has synonymous with other words and their
conceptual meaning differs from one to the other.
 DEPRECIATON
• Depreciation : It is charged to all fixed assets like Land &
Building, Plant & Machinery, Furniture & Fixture , etc. as per
a specific method adopted.

• Depletion : it is the exhaustion of natural resources like

mines, iron ore, oil wells, etc.

• Amortisation : It is applied to intangible assets like patents,

copyrights, goodwill, trade marks, etc.
 DEPRECIATON
OBJECTIVES / PURPOSE OF CHARGING DEPRECIATION :
1. To ascertain the true profit of the business,
2. To show the true presentation of financial position,
3. To provide fund for replacement of assets,
4. To show assets in their reasonable value in the balance
sheet
 DEPRECIATON
OBJECTIVES / PURPOSE OF CHARGING DEPRECIATION :
1. To ascertain the true profit of the business,
2. To show the true presentation of financial position,
3. To provide fund for replacement of assets,
4. To show assets in their reasonable value in the balance
sheet
FACTORS AFFECTING DEPRECIATION :
1. Original cost of the assets,
2. Useful life of the assets,
3. Estimated scrap or residual value of the asset at the end
of its life,
4. Selecting an appropriate method of depreciation.
 DEPRECIATON
METHODS OF CHARGING DEPRECIATION :
1. Straight Line Method,
2. Written Down Value Method,
3. Annuity Method,
4. Sinking Fund Method,
 DEPRECIATON : Methods
STRAIGHT LINE METHOD : Meaning & Formula
1. Also known as “Constant Charge Method”, as depreciation
charged on fixed assets every year is constant and
unchanged till the life of the assets.

1. It is calculated by deducting the scrap value from the

original cost of the assets and the balance is divided by the
number of years (estimated life of the assets).

1. Under this method, depreciation is calculated as:

Amount of Depreciation = (Original Cost of Assets – Scrap
Value) / Estimated Life of Assets
 DEPRECIATON : Methods
STRAIGHT LINE METHOD : Example
1. Cost of the Machine Rs. 30,000
Erection Charges Rs. 3,000
Estimated Useful Life 5 years
Estimated Scrap Value Rs. 3,000
1. Under this method, depreciation is calculated as:
Amount of Depreciation = (Original Cost of Assets – Scrap
Value) / Estimated Life of Assets
Now, Amount of Depreciation = Rs. (33,000 – 3,000) / 5 = Rs. 6,000

Thus, amount of depreciation would be Rs. 6,000 for every year.

 DEPRECIATON : Methods
WRITTEN DOWN VALUE METHOD : Meaning & Formula
1. Also known as Reducing Balance or Reducing Instalment
Method or Diminishing Balance Method
 DEPRECIATON : Methods
Example-
 DEPRECIATON : Methods
ANNUITY METHOD – meaning & formula
 DEPRECIATON : Methods
ANNUITY METHOD – example
 DEPRECIATON : Methods
SINKING FUND METHOD – methods & formula
 DEPRECIATON : Methods
SINKING FUND METHOD – example
• Samrat & co. Having a machinery costing -$10,000 and its
residual value is $2000. interest rate is- 10%
time period is – 3 years .
Calculate the depreciable amt.
ANS-

= (10,000 – 2000) 0.01 / ( (1 + 0.01)^ - 1 ) ^=3

= 800/0,0303
= 2640.