DEPRECIATION

Depreciation
It appears as one of the costs in the Cost
Statement.
This is essentially the cost of using the fixed
assets of the business for the period covered
by the cost statement.
 Fixed Assets are those tangible items
purchased by the business, for use in the
business , usually over several years.
Examples of fixed assets
• Sewing machines
• Band Knife
• Straight Knife
• Furniture and fittings
• Motor Vehicles
Why Depreciation ?
• It would be inequitable for one period
to bear the complete cost of fixed
assets when those assets may be used
for several years.
• Thus , a proportion of the fixed assets
cost is included in the overheads to
represent the amount of the fixed
asset’s cost consumed by the period.
Why Depreciation ?
• Depreciation is a good estimate to find
out that proportion.
• There are accounting strategies for
calculating the appropriate amounts of
depreciation.
Example
• A clothing manufacturer purchases
some new sewing machines, at a cost
of Rs 16000. She estimates that they
will have a useful life in her factory of
five years and at the end of that five
years they will have a scrap value of Rs
1000.
Example
• Amount of Depreciation can be
calculated :
• Cost of asset less scrap value /
Estimated life of asset.
• Ans: Rs 3000 per annum.
To Summarise
• Depreciation is an accounting method
of spreading the cost of fixed assets
over their useful life.
Example
• A clothing manufacturer purchases
some new sewing machines, at a cost
of Rs 16000. She estimates that they
will have a useful life in her factory of
five years and at the end of that five
years they will have a scrap value of Rs
1000.