DEPRECIATION ACCOUNTING Depreciation is an expenses and not

DEPRECIATION ACCOUNTING Depreciation is an expenses and not a loss Depreciation is reduction in the value of fixed assets due to use, wear and tear, obsolescence and changes in the market conditions. Necessity of charging depreciation: ØCalculation of true cost of production. ØReplacement of fixed assets at the end of its useful life. ØDetermining the true profit or loss. ØReflecting the true and fair view of financial position in the Balance Sheet

Factors considered for charging depreciation in the accounts: • Original cost of the Fixed asset. • The estimated scrap value at the end of its useful life • The useful life of the asset. Methods of computation of depreciation: • There are several methods of computing depreciation of which the following are relevant for our discussion • Straight Line method • Diminishing Balance method • Depletion method

Methods of accounting for depreciation: Basically two methods of accounting depreciation are recognised • Charging depreciation in the asset account itself • Charging depreciation in a separate provision account.

JOURNAL ENTRIES: • For purchasing fixed assets Fixed Asset A/C -----------------Dr To Cash/Bank/ Creditors A/C • For expenses incurred on installation of asset Assets A/C---------------------Dr To Cash/Bank a/C • For Charging annual depreciation Depreciation A/C ----------------Dr To Asset A/C

• For sale of assets- Bank/Cash A/C ------------------Dr To Fixed Asset A/C • For loss on sale of asset. P/L A/C ----------------------Dr To Asset A/C For profit on sale pass reverse entry.