RICS-SBE/XX/XX/S006/R02

Revised on: 26-08-2021

Welcome all

Topic: Concept of Depreciation and its Types

Agenda of the Presentation:

1. To discuss about concept of Depreciation and its importance in Accounting.

2. To understand types of depreciation charging methods and difference between them.

3. To understand about assets account and depreciation accounting

Accounting Principles and Procedures

Depreciation- A Non Cash Expense:

► It is a measure of wearing out , consumption or other loss of value of a

depreciable asset arising from use, effusion of time or obsolesces thro
ugh technology and market changes. Depreciation is allocated so as to
charge a fair portion of the depreciable amount in each accounting peri
od during the expected useful life of the asset. Depreciation includes t
he amortisation of assets whose useful life is predetermined.
Characteristics of Depreciation

1. Depreciation in fall in value of tangible , long term asset.

2. It reduces the book value of the asset. however its market value may be different.

3. The fall in the book value of asset is permanent, gradual and of continuing nature.

4. Depreciation is an expense but does not involve cash.

5. Depreciation is an expense and therefore it is debited to profit and loss account, whether there is profit
or not.

6. It is not a process of valuation of assets, it is process of allocation of cost of the asset to the period of its l
ife.
Accounting Principles and Procedures

Other related concepts:

Accounting Principles and Procedures

Factors Effecting Depreciation:

► Actual Cost of the Asset

► Estimated useful Life of the asset

► Estimated Residual value of the asset

Depreciation:

Important conditions for charging Depreciation:

► Following are the 3 important conditions for charging depreciation on any asset:

1. Life of the asset should be more than 1 year.

2. It should have limited life, assets with unlimited life can’t be depreciated.

3. Asset should be held for use in Production.

Concept of Depreciation

As Per AS 6

► Depreciation is a systematic allocation of depreciable value of depreciab

le asset, written off over useful life of asset, irrespective of actual use, us
ing appropriate method.

Depreciable value: It is that part of an asset which we depreciate. Also we can

say that sum total of depreciation = Depreciable value
Depreciable value= Cost price – scrap value

Systematic Allocation: Any method of charging depreciation which gives

systematic expense on assets.
There are 2 appropriate methods of systematic allocation: SLM & WDV.

Useful Life of asset: It means expected life of an asset for which it is going to
be used in business. It is some part of economic life of an asset.
Depreciation:

Contd…

► Useful life of an asset is estimated by management, for this purpose follo

wing factors are taken into account/consideration:
1. Change in technology
2. Wear and tear of asset
3. Applicable laws.
Accounting Principles and Procedures

Depreciable Asset:

► Ind AS-16 defines an asset as depreciable asset if it meets the following q

ualifications:

1. The asset is to be used for the period of more than one accounting year.
2. The asset has finite useful life (not like land which has infinite useful life)
3. The asset is maintained by the business enterprise in producing goods/se
rvices or renting it to others as part of core business activities or for admini
strative purpose.
4. The asset is not held primarily for the purpose of sale.
Accounting Principles and Procedures

Depreciation Method:

1.Straight Line Method OR Fixed Instalment Method OR Original Cost Meth

od.

Annual Dep = Acquisition cost of asset – Estimated Scrap value

Estimated useful life of Asset

2. Written down value method: under this method, depreciation is charged

in the opening net book value of the asset in each of the year; therefore, it
results into reducing amount of depreciation year after year, till the end of
useful life of the asset.
This is also called as “reducing balance method” of charging depreciation.
Illustration/ Example:

Straight line method of Depreciation:

► A firm bought a machinery for Rs. 7,40,000 on 1 st April 2020 and Rs. 60,000 were spent on installation. Its usef
ul life is estimated to be 5 years. Its estimated realizable scrap value at the end of period was estimated at Rs.4
0,000. Find out annual depreciation.

► Solution: Cost- Estimated scrap value/ useful life

(7,40,000 + 6,000)- 40,000 = 1,52,000
5

Hence per SLM , annual depreciation is Rs.1,52,000

Illustration/ example

Written down value method:

► A firm purchased an old truck for a sum of Rs.2,00,000 on 1st April 2020. it charged depreciation @ 20% on WDV meth
od. Calculate amount of depreciation for first 3 years.

► Solution: 1st year depreciation: 20% of 2,00,000 = 40,000

2nd year depreciation: 20% of (2,00,000-40,000) i.e. 1,60,000 = 32,000
3rd year depreciation: 20% of (1,60,000-32,000) i.e. 1,28,000 = 25,600

Note: You can see that every year amount of depreciation is changing as it is calculated on reduced value every year.