DEPRECIATION AND ITS ACCOUNTING

Depreciation is a loss or decrease in value of asset due to period of time, constant use, wear and tear,
accidents, obsolescence etc.this is continuing procrss due to which the book value of asset declines.
 It is an operational cost
 It is allocation of cost
 It is non-cash expenditure
 It is recorded in debit side of profit and loss account
 If it is not charged, the assets will be shown at a value more than its actual value
 So depreciation is charged to show fair and true value of asset
 Provision for depreciation avoids the over payment of income tax
Obsolescense: some times assets become old and useless. So,loss due to old machine and equipment is
called obsolescense.

OBJECTIVE / NEED OF DEPRECIATION

 Correct financial position
 To ascertain true value of asset
 To reduce tax liability
 Retain profit for replacement of the asset

FACTOR / ELEMENT
1. Cost of asset (original cost including installation)
2. Life of asset
3. Residual value / Scrap value ( at the end)

Original cost= incoice price + Transportation + wages for installation of Machinery + Taxes +Repair of old
Machinery before putting to use
Residual Value= Sale price of asset at end

ENTRIES FOR DEPRECIATION

Depreciation a/c Dr
To Asset a/c

METHODS OF CHARGING DEPRECIATION

1. Straight Line Method or Fixed Installment Method

2. Written Down Method or Diminishing Balance Method
3. Sum of Year’s Digit (SYD) Method

Fixed / Straight Line Method:

 Depreciation will charge on original cost
 Amount of depreciation is same every year
 Book value of the Asset become Zero at the end
Depreciation= Original cost-Scrap / Estimated life

Example 1: An asset has been purchased for Rs 38000/- estimated life is 8 years. It is also estimated that
its scrap value is Rs 6000/- The amount ofannual Depreciation would be:
Depreciation= Original cost-Scrap / Estimated life
D=38000-6000/8 =32000/8 =4000 P.A.

Example 2: Ram purchased a machinery for Rs 40000 and has scrap value at end of life of 10 year is
4000. Calculate amount of depreciation to be charged each year.
Depreciation= Original cost-Scrap / Estimated life
D= 40000-4000/ 10 =36000/10 = 3600 P.A.

Example 3: On 1st april 2018 purchased a machine costing Rs 52000 expected that machinery to be
operational for 5 year. Cost of repair Rs 8000 installation Rs 5000 and transportaion charges Rs 1500. At
the end it can be sold for Rs. 2500. Calculate depreciation expenses for the financial year ended 31
march 2019.
Original cost=invoice price + Repair+ Installation + Transportaion
= 52000+8000+5000+1500 =66500
Depreciation= Original cost-Scrap / Estimated life
D= 66500-2500 / 5= 64000/5 = 12800 P.A

Example 4: cost of vehicle 102000, estimated life is 6 years,scrap value 18500,Repair 6000, Installation
2000 calculate depreciation expenses.
Original cost=invoice price + Repair+ Installation + Transportaion
Original cost= 102000+6000+2000 =110000
Depreciation= Original cost-Scrap / Estimated life
D= 110000-18500 / 6= 91500/6 = 15250 P.A

Written Down Method or Diminishing Balance Method

 Depreciation is calculated on book value or written down value
 Amount of depreciation reduces every year
 Book value will never Zero
 This method is approved by income tax authorities
 Suitable for assets which require more repair expenses with passage of time

In the 1st year amount of depreciation will be same in both method

Depreciation
1st year =100000x10% =10000
nd
2 year = (100000-10000) =90000x10% =9000
rd
3 year =(90000-9000) =81000x10% =8100

Example 1: original cost 10 lac, economic life 5 years, calculate depreciation for 1st and 2nd year on
WDV
Rate: 100/ economic Life
Rate: 100/5 =20%
1st year = 10,00,000x20/100 = 2,00,000
st
WDV after 1 year = 10,00,000-2,00,000 =8,00,000
2nd year = 8,00,000x20/100 =1,60,000
WDV after 2nd year = 8,00,000-1,60,000 =6,40,000

Example 2 :Machine cost Rs 1,60,000 installation Rs 40,000 Depreciation 10% after 5 th year WDV
Year Value Depreciation WDV
1 2,00,000 2,00,000x10/100=20000 2,00,000-20000=180000
2 180000 180000x10/100=18000 180000-18000=162000
3 162000 162000x10/100=16200 162000-16200=145800
4 145800 145800x10/100=14580 145800-14580=131220
5 131220 131220x10/100=13122 131220-13122=118098

Example 3: An asset of Rs 30000 was purchased on 1st april 2016 ans is to be depreciated @10% p.a.
on written down value method. In 3rd year it is sold for 15000 on 1st july 2018. Prepare asset account
of accounts are closed on 31st dec every year.

Date Particular Amount Date Particular Amount

1-04-2016 To bank 30000 31-12-2016 By Depreciation 2250
3000x9/12
31.12.2016 By bal c/d 27750
30000 30000
1-01-2017 To bal b/d 27750 31.12.2017 Depreciation 2775

31.12.2017 By bal c/d 24975

27750 27750
01.01.2018 To balb/d 24975 01.07.2018 By cash a/c 15000
By depreciation 1248.75
2497.5x6/12
By P & L a/c 8726.25
(Loss)
24975 24975
 Sum of Year’s Digit (SYD) Method
To calculate depreciation charges using the sum of the year’s digits method, take the expected
life of an asset (In year) count back to one and add the figures together. This is a method of
calculating depreciation of an asset that assumes a higher depreciation charge and a greater tax
benefit in the early year of an asset’s life.
Example 1: estimated life 5year, Original cost Rs 10000, find value of Depreciation for 4th
year
5 year useful life= 5+4+3+2+1
Sum of the year=15
In the 1st year the asset would be depreciated 5/15 in value, in 2nd year 4/15, in 3rd year 3/15, in
4th year 2/15 of value
Depreciation = 10000x2/15 =1333

Example 2: machinery Rs 40000, estimated life 6 year, amount of Depreciation in 2 nd year

Sum of year=6+5+4+3+2+1=21
Amt of depreciation= 40000x5/21=9523
1st year= 40000x6/21 = 11429
nd
2 year=40000x5/21 = 9523
rd
3 year=40000x4/21 = 7619
th
4 year= 40000x3/21 = 5714
th
5 year=40000x2/21 = 3809
6th year=40000x1/21 = 1905

ONE LINER QUESTIONS

Depreciation is charged on
Fixed asset / current asset / Goodwill / liabilities-1
Sale price of asset at end of life is
Scrap value / Original cost / Cost price / Depreciation-1
In straight line method Depreciation remains
Decreased / Increase / Constant / None-3
Scrap value is__from cost to calculate depreciation
Added / Subtracted / Multiplied / none-2
Provision for depreciation is
Asset / Capital / Liability / Expense-3
The depreciation expenses is
Cash expense / Non cash / long term cash expense / short term cash expense-2
Revaluation method of depreciation is used in-Loose tools
As per income tax act, which method of depreciation is used-WDV