Depreciation Methods and

Accounting
 What Is Depreciation?

• Depreciation is the permanent and continuing diminution in the quality,

quantity, or value of an asset.
or
• The term depreciation refers to an accounting method used to allocate the
cost of a tangible or physical asset over its useful life or life expectancy.
Depreciation represents how much of an asset's value has been used.
• Depreciating assets helps companies earn revenue from an asset while
expensing a portion of its cost each year the asset is in use. Not accounting
for depreciation can greatly affect a company’s profits. Companies can also
depreciate long-term assets for both tax and accounting purposes.
Basic Features of Depreciation
• The term ‘Depreciation’ used only in respect of fixed assets.
• Depreciation is charge against profit.
• Depreciation is different from maintenance.
• Land and Antiques are the exception for Depreciation.
Amortization and Depletion
• Amortization- the process of written off intangible assets is termed as
amortization. Some intangible assets like patents, copyrights, have a
limited useful life. Hence, their cost must be written off over such
period.
• Depletion- Depletion implies removal of an available but irreplaceable
resources such as extracting coal from a coal mine or oil out of an oil
well.
Objective of provision Depreciation
• Ascertainment of True profit
• Presentation of true financial position
• Replacement of assets
• Deduction from income tax
• Legal compulsion- no co. can declare dividend for the year, unless
depreciation has been provided on fixed assets.
• Other reasons- if dep. Has not been provided on assets, profit will be
overstated and it will require payment of high dividends, more bonus,
higher taxes and higher wages which will be against the business
conditions.
 Methods of recording depreciation
When a provision for depreciation account is maintained
 Methods of recording depreciation
When a provision for depreciation account is not
maintained
 Method of Depreciation
Straight line method (SLM)

i. This method is also known as 'original cost method'

ii.Under this method, depreciation is charged at fixed percentage on the original cost
of the asset, throughout its estimated life.
iii.Under this method the amount of depreciation is uniform from year to year. That
is why this method is also known as 'Fixed Installment Method' or 'Equal
installment method'.
iv.The annual amount of depreciation can be easily calculated by the following
formula :
Annual Depreciation = Original cost - Estimated scrap value
Estimated life
Question no. 1
• Anurag purchased a machine on 1st April 2016 for 24100 and spent Rs.
900 on its installation. The working life of assets is 10 years. The
salvage value of the machine is Rs. 1000. the account are closed on
31st of March each year. Prepare Machine account and Depreciation
Account by fixed instalment method for first four years in the books of
Anurag.
 Method of Depreciation
Diminishing balance method

• Under this method, depreciation is charged as a fixed percentage on

the book value of the asset every year. In first year the depreciation
will be charged at the end of the year, on the total cost of the asset.
• Hence, in this method, rate of depreciation is same but amount of
depreciation goes on decreasing every year. Therefore, this method is
also known as 'written Down Value Method' and 'Reducing Installment
Method'.
Example