DEPRECIATION

In accounting terms, depreciation is

defined as the reduction of recorded cost of
a fixed asset in a systematic manner until the
value of the asset becomes zero or negligible
unless it have a residual value.
Depreciation is a permanent, continuing
and gradual shrinkage in the value of a fixed
asset.
An example of fixed assets are buildings,
furniture, office equipment, machinery etc..
 DEPRECIATION OCCURS DUE TO:-
• Way of using

• Effluxion of time

• Obsolescence through technology

• Market changes
Inside:-
• Institute of Chartered Accountants of India(ICAI)
issues Accounting Standard(AS-6) for depreciation
accounting of different assets.
• AS -6 doesn’t applies only for goodwill, forests,
plantations, natural resources like minerals,
expenditure on R&D and live stocks.
• A land is the only exception which cannot be
depreciated as the value of land appreciates with
time, unless it has a limited useful life for the
company.
DEPRECIABLE ASSETS
Assets which are expected to be used during more than one
accounting period and are held by an enterprise for use in the
production or supply of goods and services, for rental to others, or for
administrative purposes with limited useful life.
But not for the purpose of sale in the ordinary course of business.

Determinants of depreciation
• Historical cost or revalued amount of asset.
It is based on its nominal or original cost of asset when acquired by
the company.
• Expected useful life of asset.
Period over which asset is expected to be used and the number of
production expected to be obtained from its use.
• Estimated residual value of asset
It is the amount expected to be realised on disposal of an asset at the
end of its useful life.
METHODS OF DEPRECIATION
 SLM- Straight line method.
 WDV- Written down value method/Reducing balance.

Important factors to be checked for

selection of above method-
• Type of asset, say, prone to fast obsolescence.
• The nature of use of such asset whether frequent or
infrequent.

• Circumstance prevailing in the business

• Tax considerations
IMPORTANCE OF DEPRECIATION
Depreciation is must in financial statement and governed by
The income tax act and The companies act.
Different sections/acts required to control common
depreciation practises are as follows-
 Rate of depreciation(schedule 14, Sec 350)
 Accounting Standards (Section 129)
 Accrual Basis of Accounting (Section 128)
 True and Fair View (Section 129)
 Declaration of Dividend (Section 123, 205)
 Managerial Remuneration (Section 198)
OTHER IMPORTANT TERMS-
 Accounting policies are the specific principles and
procedures implemented by a company's
management team and are used to prepare its
financial statements
 Estimated realisable value is calculated as per
sec 350 as per which at least 95% of the original
cost is depreciated.
 If the accounting standard is not followed, it
must be disclosed along with reason for not
following and its financial effect(sec 129,133).
 MAT is minimum alternate tax is applicable now
for companies when their taxable income may be
nil or less then 18% of their book profits.