DEPRECIATION & ITS METHOD’s

Presented By :
Meghana Kadakabhavi 069
Pallav Narad 078
Preeti Israni 083
R Anjana 120
 Depreciation

A reduction in the value of an asset over time.

 Assets

A useful or valuable thing or person

Types Of Assets:

Current Fixed
Asset Assets
 Features

• Term is related to depreciable fixed assets only

• A charge against profits
• Caused due to wear and tear, course of time,
obsolescence.
• A non-cash expenditure
• Permanent and continuous decrease in the book
value of an asset.
 OBJECTIVES

1. Ascertainment of true profits.

2. Presentation of true financial position.

3. Replacement of assets.
 The major causes of depreciation are as follows:

1. Wear And Tear

wear and tear refer to a decline in the efficiency of asset due to
its constant use.

2. Effusion Of Time
The value of asset may decrease due to the passage of time even
if it is not in use.

3. Exhaustion
An asset may loss its value because of exhaustion too. This is the
case with wasting assets such as mines, quarries, oil-wells and
forest-stand.
4. Obsolescence
Changes in fashion are external factors which are responsible for throwing
out of assets even if those are in good condition.

5. Other Causes
Market value and accident of an asset are other causes of depreciation
which decrease in the value of assets.
 Schedule 2(of Companies Act 2013)

Introduction
• Earlier, the depreciation on fixed assets of companies are regulated by Schedule
XIV of Companies Act, 1956 along with Accounting Standard 6 and guidelines
issued by ICAI.
• As per schedule XIV of Companies act, 1956, depreciation rates has been provided
for Straight line Method as well as Written down Value.
• There is a short description of assets due to which a confusion is created for
charging depreciation
As per Schedule II of Companies Act, 2013 The description of Fixed assets has been
more detailed to short out the problem of rates of charging depreciation and the
maximum life of assets has been provided so that the Financial statement can provided
a true and fair view. The depreciation can be charged after taking into consideration of
• Useful Life
• Residual Value
 Useful Life

As per Schedule II, useful life is the period over which a depreciable asset is expected to
be used by an entity.

The following factors shall be considered in determining the useful life of an asset:

(a) Technical or commercial obsolescence arising from changes or improvements in

production

(b) Expected physical wear and tear, which depends on operational factors such as the
number of shifts for which the asset is to be used and the repair and maintenance
programme, and the care and maintenance of the asset while idle.
There are two circumstances arise:

 As per management, useful life is more than provided: – The

useful life can be taken either provided by the management
or as provided by Schedule II.

 As per management, useful life is less than provided: – The

useful life as per the management is to be taken for charging
depreciation.
 RESIDUAL VALUE

Expected residual value means the sale price of scrap value of asset after
the completion of useful life of assets. The schedule II provides the
residual value should not be more than 5% of the original cost of the
asset. However it can be less than 5% of the original cost, then it should
be taken as provided by the management.
 Methods of
Depreciation

Straight Line Accelerated Production-

Method Method unit Method
 Straight Line Method

 Evenly Charged

 Most common method

 Straight forward calculation

 Formula

Depreciation= Original cost of fixed Asset-scrap value

Year of Useful life

Cost of the asset = Is the purchase price of the asset.

Scrap Value = Is the value of the asset at the end of its useful life.
Useful life = The number of periods in which the asset is expected
to be used by the company.
 Example

ABC company purchased furniture for rupees 10,000, the

depreciation as per straight line method is 2000 per
annum, when will the value of furniture will be nil?
 ACCELARATED METHOD

 Provides relatively low amount of the depreciation in

the early years of an asset’s useful years and smaller
in the later years.
 2 methods
1. Diminishing Method
2. Sum of the year’s digit method
 Sum of the year’s digits method

 This is based on the assumption that the productivity

of the asset decreases with the passage of time.
Under this method, a fraction is computed by
dividing the remaining useful life of the asset on a
particular date by the sum of the year's digits.
 Formula
Depreciation expense=
Remaining useful years of the asset × Depreciation cost
sum of the years
 Question

On January 1st Abc ltd. company purchased a

machinery. Cost of the machine is $250000,Expected
useful life is 5 years and Salvage value is $25000.
Calculate the depreciation expense?
 DIMINISHING METHOD

 Charged at fixed percentage.

 Charged not on the original cost but on the reducing
opening balance.
 Also called as Reducing Balance Method or Written
Down Value Method.

QUESTION:
Find depreciation for a machinery purchased for Rs. 80000 at 10% for 3
years.
 Production-units Method

 Depreciation arises solely from the use of an asset.

 Where this method is used:
 When it is possible to estimate the productive capacity of an
asset.
 Direct relationship between an asset use and its loss of
service potential.
 Where an asset’s output fluctuate widely.
How to calculate depreciation under Production-
units Method:

Step-1: Depreciation rate= Total depreciable amount of an asset

Total estimated output

Step-2: Yearly Depreciation Expense= Unit rate × Yearly Output

 Example:
If the bus has an estimated useful life of 200000 km, accumulated
depreciation is 720000 and its cost is 800000, the depreciation would
be worked as follows:

Depreciation rate= 720000 = 3.60 per km used

200000

Let us assume that the bus log shows usage following:

Year Usage
1 10000
2 30000
3 70000
4 20000
5 50000
6 20000
Depreciation Schedule: Production-Units Method

Year Cost Yearly Accumulated Ending

Depreciation Depreciation Carrying
Amount
1 800000 10000×3.6= 36000 764000
36000
2 800000 30000×3.6= 144000 656000
108000
3 800000 70000×3.6= 396000 404000
252000
4 800000 20000×3.6= 468000 332000
72000
5 800000 50000×3.6= 648000 152000
180000
6 800000 20000×3.6= 720000 80000
72000
 Conclusion

 Depreciation is a non cash payment.

 This is calculated in 3 different methods.
 Straight line method deals with same amount
throughout.
 Acceleration method focuses on providing larger
amount in the beginning and smaller in the late year.
 In Production-unit method depreciation arises solely
from the use of an asset.