DEPRECIATION

INTRO OF
DEPRECIATION

The word depreciation means
deterioration in the price.IN common
word depreciation is the gradual
reduction in the value ,quantity and
quality of various fixed assets (Building,
Manchiner, Furniture ,etc) due to their
continuous use in the business
operation.
 DEFINITIONS

According to J.N.Carter Depreciation is the
gradual and permanent decrease in the value
of an assets due to any cause.
According to J.H.Butron Depreciation is the
shrinkage in the value of an asset at a given
date as compared with its value at a previous
date.
CHARACTERISTICS OF DEPRECIATION

Depreciation is a normal loss of business.
The value, quality, and quantity of an assets
deteriorates in depreciation.
In this , the value of an assets declines
gradually and continuously.
It is generally related with the fixed assets.
It is always related with the book value and
cost price of an asset.
 OBJECTS OF DEPRECIATION

Know the net profit or loss.
To put equal load on profit and loss Account.
To show the assets at their fair value.
To calculate cost of production.
To provide for Replacement of assets.
To provide for secret Reserve .
 MERITS OF DEPRECIATION

Simplicity.
Equality of Depreciation Burden.
Assets can be completely written off.
Knowledge of original cost and up to date
Depreciation.
 DEMERITS OF DEPRECIATION

Difficult in Computation.
Unequal Charge Against Income.
Undue Pressure in later Years.
Omission of Interest Factor.
Unrealistic to write off the value of Asset to
Zero.
Difficulty in the Determination of scrap value.
METHODS OF DEPRECIATION

Fixed Installment Method.
Diminishing Balance Method.
Depreciation Fund Method.
Sum of year Digits Method.
Machine Hour Rate Method .
Inventory System of Depreciation.
Annuity Method.
Insurance Policy Method.
 Fixed instalment Method

The amount of Depreciation is calculated
by deducting the scrap value from the
original cost of the asset and then by
dividing the remaining balance by the
number of years of its estimated life.
Yearly Depreciation=original cost of
assets-scrap value/Estimated life of the
asset.
 Example fixed
Method

On 1st jan ,2008 Ashok Glass Ltd purchased a Machine for Rs52,000
and spent Rs3,000 on its carraige and Rs1,000 on its erection . On
the date of purchase, it was estimated that the effective life of the
machine will be 10 years and after 10 years ,its scrap value will be
Rs6,000.
Required Machine A/C and Depreciation A/C for 4 years after
providing depreciation on Fixed Installment Method .
Accounts are closed on 31st December each year.

Solution: As the rate of depreciation is not given in question, the

amount of annual depreciation will be arrived as under.

Annual Depreciation =cost of Asset scrap value/Estimated life of

Asset
= RS 56000-Rs 6,000/10 years
=50,000/10
Diminishing Balance Method

Under this method ,Depreciation is
calculated on a certain fixed rate on the
balance of asset. Thus ,the amount of
depreciation goes on reducing in later
years as compared to previous year.
Annual Depreciation =value of asset x
Rate of depreciation /100
 Example of Diminishing method

Date about a plant are as fallows.Ascertain the rate of
depreciation for Diminishing Method.
Solution scrap value =cost Price x(100-R/100)Expect life
year
scrap value =Rs64000
Cost price=Rs1,00,000.
Estimated life=3 year and Rate=?
6,400=1,00,000x(Rs2/100)3
6,400/1,00,000=(100-R/100)3
3o.064=(100-R/100)3
0.4x100=100-R
R=100-40
R=60%
THANK YOU