Depriciation

⚫ Depriciation is a gradual and permanent decrease in

the value of assets from any cause. (R.N.Carter)

⚫ Depriciation may be defined as permanent and

continuing diminution in quality ,quantity or the
value of assets. (william pickles)
CHRACTERSTICS OF DEPRICIATION
⚫ Decrease in the value of assests
⚫ Gradual decrease
⚫ Process of allocation not of valuation
⚫ Permanent decrease in the value of assets
Causes of depriciation

⚫ Constant use
⚫ Effect of time
⚫ On expiry of legal rights
⚫ Accident
⚫ Human mistake
⚫ Obsolescence
⚫ Fall in price
⚫ Depletion
Need ,objectives or significance of
providing depriciation
⚫ To ascertain true profit and loss
⚫ Ascertainment of correct cost of production
⚫ Presentation of correct economic position
⚫ Arrangement of funds for the re-establishment of
assests
⚫ To prevent the distribution of profits out of capital
⚫ To save the income tax
Use of depreciation in other related terms
⚫ Depreciation- used for physical assets
⚫ Amortization- used for intangible assets
⚫ Depletion- used for natural resources
⚫ Dilapidation- used in contract of lease
Factors determining the amount of
depreciation
⚫ Cost of assets
⚫ Estimated useful life of assets
⚫ Estimated scrap value of assets
Methods for recording depreciation

⚫ 1. provision for depreciation account is to be

maintained .
⚫ 2. provision for depreciation account is not to be
maintained..
Methods for providing depreciation
⚫ Fixed installment method

⚫ Diminishing installment method

⚫ Annuity method

⚫ Depreciation fund method

⚫ Insurance policy method

Fixed instalment method
⚫ A certain and equal amount is deducted
annually as depriciation.
⚫ Easy method.
⚫ Suitable for all type of business.
⚫ Value of asset become zero at the end of working life
of asset.
⚫ Depriciation is shown as a direct deduction from the
value of asset in balance sheet.
Demerit of fixed instalment
⚫ Equal depriciation is charged every year but the
efficiency of asset decreases with the passage of time.
⚫ No provision for interest on investment on asset.
⚫ No provision for replacement.
⚫ Difficult to estimate residual value.
⚫ Only considers the time duration,not on actual use of
asset.
Application of fixed installment method
⚫ Applicable for those assets on which repair and
renewal expenses are very less.
Calculation of depriciation
⚫ On the basis of working life of assets=
⚫ Depriciation=cost of assets-scrap value/
⚫ estimated life of asset

⚫ On the basis of % =
Depriciation = cost of asset * rate/100
Diminishing balance method
⚫ Depriciation is calculated on the opening balance of
asset every year.
⚫ Easy calculation of depriciation.
⚫ In initial year dep. Is more and repair charges are less
and in later year deprication is less and repair is
more.so equal effect on profit and loss account.
⚫ Value of asset never become zero.
⚫ Method is permissible under income tax act 1961.
Demerit of diminishing balance method
⚫ Detrmination of suitable rate is tough.
⚫ Value of asset can not be reduced to zero.
⚫ No provision for replacement.
⚫ No provision for interest.
⚫ Dep. Is more in initial year and less in later years.
⚫ If less rate is decided then more years are required for
amortization of asset but asset ended earlier.
Application of method
⚫ Applicable on those assets which have more working
life like
⚫ building
⚫ plant
⚫ machinery
Difference in fixed and diminishing method
Fixed instalment
⚫ Amount of dep. Remains
equal.
⚫ Calculated on initial book
value.
⚫ Book value can be reduced to
zero.
⚫ Rate of dep is kept lower.
⚫ Effect of dep and repair is not
equal on p&l a/c.
⚫ This method is not approved
by income tax authority.
Diminishing method
⚫ Amount of dep. Reduces every
year.
⚫ Calculated on written down
value.
⚫ Bookvalue never become zero.
⚫ Rate of dep is kept higher as
compared to fixed instalment
method.
⚫ Effect of dep and repair on p&l
a/c is equal.
⚫ Approved by income tax
authority