Depriciation Depriciation is a gradual and permanent decrease

Depriciation �Depriciation is a gradual and permanent decrease in the value of assets from any cause. (R. N. Carter) �Depriciation may be defined as permanent and continuing diminution in quality , quantity or the value of assets. (william pickles)

CHRACTERSTICS OF DEPRICIATION �Decrease in the value of assests �Gradual decrease �Process of allocation not of valuation �Permanent decrease in the value of assets

Causes of depriciation �Constant use �Effect of time �On expiry of legal rights �Accident �Human mistake �Obsolescence �Fall in price �Depletion

Need , objectives or significance of providing depriciation �To ascertain true profit and loss �Ascertainment of correct cost of production �Presentation of correct economic position �Arrangement of funds for the re-establishment of assests �To prevent the distribution of profits out of capital �To save the income tax

Use of depreciation in other related terms �Depreciation- used for physical assets �Amortization- used for intangible assets �Depletion- used for natural resources �Dilapidation- used in contract of lease

Factors determining the amount of depreciation �Cost of assets �Estimated useful life of assets �estimated scrap value of assets

Methods for recording depreciation � 1. provision for depreciation account is to be maintained. � 2. provision for depreciation account is not to be maintained. .

Methods for providing depreciation �Fixed installment method �Diminishing installment method �Annuity method �Depreciation fund method �Insurance policy method �Revaluation method �Depletion method

Fixed instalment method �A certain and equal amount is deducted annually as depriciation. �Easy method. �Suitable for all type of business. �Value of asset become zero at the end of working life of asset. �Depriciation is shown as a direct deduction from the value of asset in balance sheet.

Demerit of fixed instalment �Equal depriciation is charged every year but the efficiency of asset decreases with the passage of time. �No provision for interest on investment on asset. �No provision for replacement. �Difficult to estimate residual value. �Only considers the time duration, not on actual use of asset.

Application of fixed installment method �Applicable for those assets on which repair and renewal expenses are very less. �Applicable on those org. where some assets have more repair expenses and some have less expenses.

Calculation of depriciation �On the basis of working life of assets= � Depriciation=cost of assets-scrap value/ � estimated SSWlife of asset �On the basis of % = Depriciation = cost of asset * rate/100

Diminishing balance method �Depriciation is calculated on the opening balance of asset every year. �Easy calculation of depriciation. �In initial year dep. Is more and repair charges are less and in later year deprication is less and repair is more. so equal effect on profit and loss account. �Value of asset never become zero. �Method is permissible under income tax act 1961.

demerit of diminishing balance method �Detrmination of suitable rate is tough. �Value of asset can not be reduced to zero. �No provision for replacement. �No provision for interest. �Dep. Is more in initial year and less in later years. �If less rate is decided then more years are required for amortization of asset but asset ended earlier.

Application of method �Applicable on those assets which have more working life like � building � plant � machinery

Difference in fixed and diminishing method Fixed instalment Diminishing method � Amount of dep. Remains equal. � Calculated on initial book value. � Book value can be reduced to zero. � Rate of dep is kept lower. � Effect of dep and repair is not equal on p&l a/c. � This method is not approved by income tax authority. � Amount of dep. Reduces every year. � Calculated on written down value. � Bookvalue never become zero. � Rate of dep is kept higher as compared to fixed instalment method. � Effect of dep and repair on p&l a/c is equal. � Approved by income tax authority