Depreciation

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 Outline
 Types of Depreciation
 Straight line depreciation
 Written down value depreciation
 Numericals

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 Straight Line Depreciation
 Simple and widely used
 In this method, equal amount is charged
 The company estimates the scrap value of the asset at the
end of the period during which it will be used
 The scarp value is an estimate of the value of the asset at
the time, it will be sold or disposed off
 Also called fixed installment method, original cost
method

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 Straight Line Depreciation
 Amount of depreciation is constant over the life of the
asset.
 This method is not efficient for organizations that have a
large number of assets.

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 Straight Line Depreciation
 Formulas
 Amount of dep. = (cost of asset-scrap value)/useful life
 Rate of dep. = (amount of dep./cost of assets)*100

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 Example # 1
 A company purchase a machine for Rs. 56000 on July 01,
2011 and spent Rs. 24000 on its repair and installation,
Rs. 5000 for its transportation. On Sep 01, 2012, a
company purchased another machine for Rs. 2,50,000
and spent Rs. 10,000 on its installation.
Depreciation is provided on machinery @10% p.a., on
Straight line Method annually on Dec 31. Prepare a
Machinery account from the year 2011 to 2014.

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 Written Down Value Depreciation
 Also called Diminishing value method, declining
balance method
 Charging depreciation on the basis of remaining balance
of assets
 Value of depreciation is calculated upon the original cost
in the first year and written down value in subsequent
years
 Applies depreciation at a higher rate at initial years and
lower depreciation rates at the ending years of the useful
life of the asset
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 Example # 2
 A company purchased on 1st Jan, 2009, a machinery for
Rs. 36000 and spent Rs. 4000 on its installation. On 1st
July, 2009, another machine purchased for Rs. 20,000. On
1st July,2011, machine bought on 1st Jan,2009 was sold for
Rs. 12,000 and a new machine purchased for Rs. 64,000
on the same date. Dep. Is provided on 31st Dec @ 10%
p.a. on the written down value method. Prepare
machinery account from 2009 to 2012.

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 Example # 3
 A company purchased machinery for 40,000 on 1st oct,
2015. Dep. is provided @ 10% p.a. on the diminishing
balance method. On 1st Jan, 2018, one fourth of the
machinery was found unsuitable and disposed off for
6,000. on the same date a new machinery at a cost of
15,000 was purchased. Write up the machinery account
for 4 years. Accounts are closed on 31st March every
year.