Financial Accounting

Topic :-
Depreciation
Depreciation

 Depreciation is a combination of two words ‘De’ &

‘Preciation’. ‘De’ means decrease & ‘Preciation’ means
Price. Therefore Depreciation means decrease in the
value of fixed Assets due to its constant use.
Methods of Depreciation

Fixed Installment Method

Diminishing Balance Method

Double Declining Balance Method

Sum of Years' Digits Method

Sinking Fund Method

Annuity Method

Insurance Policy Method

Fixed Installment Method

 This method is also known as Straight line method,

Original Cost method and Equal Installment method.
 The formula of this method is as under :-
 Depreciation = Cost of asset – Scrap Value
 Estimated life of assets
Diminishing balance Method

Under this method, the value of asset upon which depreciation is to

be calcutated is goes on diminishing, so the amount of depreciation to
be charged every year goes on declining.
Example:- Suppose the value of an asset is Rs 2,00,000 & its rate of
depreciation is 10 % p.a. The value of depreciation during 1st year is
Rs 20,000
& 2nd year is 18,000.
Causes of Depreciation

Constant use

Expiry of Time

Obsolescence

Permanent fall in price

Abnormal Factors
Need For Depreciation

 For determining Net Profit and Net Loss.

 For showing true value of assets.
 Provision of funds for replacement of assets.
 Ascertaining accurate cost of production.
 Distribution of dividend out of profit only.
 Avoiding over payment of Income Tax.