DEPRECIATION

ACCOUNTING
(AS-6)
 Concept

decrease in the value or the expired portion of the cost

of fixed asset is called as “Depreciation”.

a process of allocating the cost of a fixed asset over its

estimated useful life in a rational and systematic
manner.

AICPA- “a system of accounting which aims to distribute the

cost or other basic value of tangible capital assets less salvage
(if any) over the estimated useful life of the unit (which may
be a group of assets) in a systematic and rational manner. It is
a process of allocation and not of valuation
 Objectives
Calculating Net Profit/Loss Correct financial position

Funds for Replacement correct cost of production

Tax benefit Legal requirements.

( Companies & Income Tax Act)
 
Factors to calculate Depreciation
Cost of asset including Capital expenses for installation,
commissioning, trial run etc.

Estimated useful life of the asset

Estimated scrap value (if any) at the end of useful life of the
asset
[Also called as Salvage Value, Residual Value, Terminal Value]

Note : The Cost of the asset Less Estimated Scrap Value is called
as “Depreciable Value” which is to be written off during the
useful life
Methods of charging Depreciation

Straight Line Method Written Down Value method

Annuity Method Sinking Fund Method

Insurance policy method

 Straight Line Method
Also called as ““Fixed Instalment”, “Original Cost” Method

The depreciable value is written off over the useful life & reduced
to Nil.
An equal amount is charged as depreciation in P&L A/c.

Assumption : The usage/utility of the asset is equal in every

accounting period.
 Straight Line Method
Depreciation Amount = Cost – Scrap Value
Useful Life

Depreciation rate = Depreciation Amount * 100

Cost of Asset

Applicable for assets that have insignificant repairs &

maintenances.
 Written Down Value Method
Also called as “Reducing Balance”, “Diminishing Balance” or
“Fluctuating Instalment” method

Annual depreciation decreases every year

The asset Reduced value never touches Zero

Depreciation rate =
 Written Down Value Method
Depreciation is high, when repairs are negligible.
As repair increases, Depreciation gets lesser.

Income Tax Act mandates WDV method

Part C of Schedule II (Companies Act, 13) specifies depreciation

rates (SLM/WDV)
Schedule XIV (Companies Act,1956)

First Year-Depreciation same (under SLM/WDV)

Subsequent years- Lesser Depreciation as per WDV