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Depreciation

Accounting Standard 6
Learning Objectives
► Understand the concept of
depreciation
► Identify the causes of depreciation
► Compute depreciation as per various
methods of providing depreciation
► Appreciate the role of a proper
depreciation policy
► Understand salient feature of AS 6
Concept of Depreciation
► The concept of depreciation is closely linked
with the concept of business income.
► In revenue generation process long term assets
is used.
► At some point of time these assets becomes
useless and are disposed of and possibly
replaced.
► The assets get economically exhausted
►The economic potential so
consumed represents the expired
cost of these assets and must be
recovered from the revenue of the
business in order to determine the
income earned by the business.
Definition
► Depreciation is defined as that portion of
the cost of the assets that is deducted from
the revenue for assets services used in the
operation of a business.
► The Institute of Chartered Accountant of
England and Wales defines depreciation as
“that part of the cost of a fixed asset to its
owner which is not recoverable when the
asset is finally put out of use. Provision
► Against this loss of capital is an integral
cost of conducting the business during
the effective commercial life of the asset
and is not dependent upon the amount of
profit earned”.
Factors determining
Depreciation to be charged

► Cost of the Assets

► Estimated Scrap Value

► Estimated Useful Life of Asset


Method of Depreciation
Accounting
► When Depreciation Provision is not
maintained
For charging depreciation entry is made
Depreciation A/c Dr
To Assets A/c
For transfer to P/L account
Profit & Loss A/c Dr
To Depreciation
When provision for Depreciation
is maintained
► For providing depreciation
Depreciation A/c Dr.
To Provision for Depreciation
► For transferring the depreciation to P/L
acc.
Profit & Loss A/c Dr.
To Depreciation A/c
► On sale of Asset
A} Provision for Depreciation A/c Dr.
To Asset A/c
B} If profit: Asset Account Dr
To P/L Account
If Loss: P/L Account Dr
Asset Account
Change in depreciation
method
► Change in depreciation method may be
desired from the current year onwards.
In such a case, depreciation will be
charged according to the new method
from the current year
► Change in depreciation method may be
desired from back date. In such a case
depreciation as per old method is
calculated
► First
from the date of change and then
depreciation as per new method is
calculated from the required date of
change. Then the difference between
dep. Under two methods is adjusted to
the asset account.
Depreciation Policy
The objectives are
► Recovery of original investment, i.e. the
acquisition cost of the asset, before the expiry
of the economic life of the asset.
► Ensuring a uniform rate of return on
investment.
► Generating sufficient funds for the
replacement of the asset after the expiry of
the economic life of the asset.
► Deriving maximum tax benefit
► Ascertainment of correct profit or loss.

The above objectives are achieved if


1. Proper dep method is selected
2. Periodic review of dep provision
3. Evaluation and disclosure of
depreciation policy