Depreciation Methods and Reporting: Amit Shrivastava

Depreciation Methods and reporting
accounting.nmims@gmail.com
Amit Shrivastava
Nature of Fixed Assets

Fixed assets are longterm, relatively permanent, tangible assets such as buildings and equipment used to help produce revenues.
ASSETS
LIABILITIES
OWNERS EQUITY
Fixed Assets
EXPENSES
REVENUES
Amit Shrivastava
Nature of Fixed Assets

Fixed assets are longterm, relatively permanent, tangible assets such as buildings and equipment used to help produce revenues. All fixed assets except land lose their capacity to provide services. This loss of productive capacity is recognized as depreciation expense.
ASSETS
LIABILITIES
OWNERS EQUITY
Fixed Assets
EXPENSES
REVENUES
Amit Shrivastava
Costs of Acquiring Fixed Assets Include:

Sales tax and freight costs Installation and assembling Repairs and reconditioning (used assets) Testing and modifying Insurance while asset is in transit
Amit Shrivastava
Costs of Acquiring Fixed Assets Exclude:

Vandalism and uninsured theft Mistakes in installation Damage during unpacking and installing
Amit Shrivastava
Factors that Determine Depreciation Expense

a Initial Cost $24,000 minus
Amit Shrivastava

a Initial Cost $24,000 minus b Estimated Residual Value $2,000 equals
Amit Shrivastava

a Initial Cost $24,000 minus b Estimated Residual Value $2,000 equals Depreciable Cost $22,000 divided by
Amit Shrivastava

a Initial Cost $24,000 minus b Estimated Residual Value $2,000 equals Depreciable Cost $22,000 divided by c Estimated Useful Life 5 years equals
Amit Shrivastava

a Initial Cost $24,000 minus b Estimated Residual Value $2,000 equals Depreciable Cost $22,000 divided by c Estimated Useful Life 5 years equals
Periodic Depreciation Expense $4,400 per year

10
accounting.nmims@gmail.com Amit Shrivastava
Recording Depreciation
A Purchase equipment for $24,000. Estimated residual
value is $2,000 and useful life is 5 years.
B Record straight-line depreciation for first year.

General Journal
Description Debit Credit
General Ledger
Equipment
A B
Equipment Cash
24,000 24,000
A 24,000
Accum. Depreciation
Depreciation Expense
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Amit Shrivastava

General Journal
General Ledger
Equipment
Equipment Cash
24,000 24,000
A 24,000
Accum. Depreciation
B Depreciation Expense
4,400 4,400 Depreciation Expense
Accum. Depreciation
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Amit Shrivastava

General Journal
General Ledger
Equipment
Equipment Cash
24,000 24,000
A 24,000
Accum. Depreciation
4,400 4,400 Depreciation Expense
Accum. Depreciation
$24,000 - $2,000 = $4,400 5 years

13

General Journal
General Ledger
Equipment
Equipment Cash
24,000 24,000
A 24,000
Accum. Depreciation
4,400 4,400
4,400
Accum. Depreciation
$24,000 - $2,000 = $4,400 5 years

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4,400
Amit Shrivastava
Calculation of Book Value

General Ledger
Equipment
A 24,000
Accum. Depreciation 4,400
4,400
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Amit Shrivastava
Calculation of Book Value

General Ledger
Equipment
A 24,000
Accum. Depreciation 4,400
Original Cost Less Accum. Depr. Book Value
$24,000 4,400 19,600
4,400
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Amit Shrivastava
Depreciation Methods
The following four depreciation methods are acceptable for Financial Accounting purposes: 1. Straight-Line 2. Declining-Balance Straight-line is far more widely used than other methods. Declining-balance is known as accelerated depreciation methods.
17
Amit Shrivastava
Comparing Depreciation Methods

Straight-Line Method 10,000 Depreciation ($) Declining-Balance Method
8,000
6,000 4,000 2,000 0 Life (years)
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Life (years)
Amit Shrivastava
Straight - Line Depreciation

Accum. Depr. Book Value at Beginning at Beginning of Year of Year
$24,000.00 19,600.00 15,200.00 10,800.00 6,400.00
Year
1 2 3 4 5
Cost
$24,000 24,000 24,000 24,000 24,000
Depr. Expense for Year

$4,400.00 4,400.00 4,400.00 4,400.00 4,400.00
Book Value at End of Year

$19,600.00 15,200.00 10,800.00 6,400.00 2,000.00
$ 4,400.00 8,800.00 13,200.00 17,600.00
Cost ($24,000) - Residual Value ($2,000) Estimated Useful Life (5 years)

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Annual Depreciation = Expense ($4,400)

Amit Shrivastava
Declining - Balance Depreciation

Accum. Depr. Book Value at Beginning at Beginning of Year of Year Rate
$24,000.00 14,400.00 8,640.00 5,184.00 3,110.40 40% 40% 40% 40%
Year Cost
1 2 3 4 5 $24,000 24,000 24,000 24,000 24,000
Depr. Book Value Expense at End for Year of Year

$9,600.00 $14,400.00 5,760.00 8,640.00 3,456.00 5,184.00 2,073.60 3,110.40 1,110.40 2,000.00
$ 9,600.00 15,360.00 18,816.00 20,889.60
Note the acceleration of depreciation expense into early years of the life of the asset.
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Amit Shrivastava
Depreciation reporting
In India only two methods are allowed 1. SLM 2. WDV Minimum rate of depreciation is available in schedule 14 of the companies act.
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Amit Shrivastava
Asset with limited useful life is depreciated Hence, land is not depreciated. Land is considered to have perpetual life Depreciation = tangible Amortization = intangible In US amortization of goodwill is not permitted, but in India permitted In US impairment of goodwill is allowed
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Amit Shrivastava
Goodwill is subjected to be impairment but not for amortization that is as per US GAAP
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Amit Shrivastava
Depreciation for reporting is different from depreciation for income tax As per income tax act only WDV is allowed = rates are prescribed in the act 1961 Under WDV, we stop depreciation on asset, when 95% of the value of asset is depreciated
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When you follow WDV, you never get book value zero Depreciation is charged from the date from which asset is used. That is for reporting purpose Depreciation for income tax is differentit defines 1st six months than next six months
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Sale of asset
When you sale the asset, you decide the book value Than you compare the book value to realized value Possibilities are1. My book value can be less than realized value = profit on sale
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Change in method
When a company change the method of depreciation from SLM to WDVThe change has to be applied retrospectively [from the date ,from which the asset is being used] When you change the assumption of economic life, it is prospective
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Amit Shrivastava

Depreciation Methods and Reporting: Amit Shrivastava

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Depreciation Methods and reporting

Nature of Fixed Assets

Nature of Fixed Assets

Costs of Acquiring Fixed Assets Include:

Costs of Acquiring Fixed Assets Exclude:

Factors that Determine Depreciation Expense

Factors that Determine Depreciation Expense

Factors that Determine Depreciation Expense

Factors that Determine Depreciation Expense

Factors that Determine Depreciation Expense

Periodic Depreciation Expense $4,400 per year

B Record straight-line depreciation for first year.

B Record straight-line depreciation for first year.

4,400 4,400 Depreciation Expense

B Record straight-line depreciation for first year.

4,400 4,400 Depreciation Expense

$24,000 - $2,000 = $4,400 5 years

B Record straight-line depreciation for first year.

$24,000 - $2,000 = $4,400 5 years

Calculation of Book Value

Calculation of Book Value

Original Cost Less Accum. Depr. Book Value

$24,000 4,400 19,600

Comparing Depreciation Methods

Straight - Line Depreciation

Depr. Expense for Year

Book Value at End of Year

$ 4,400.00 8,800.00 13,200.00 17,600.00

Cost ($24,000) - Residual Value ($2,000) Estimated Useful Life (5 years)

Annual Depreciation = Expense ($4,400)

Declining - Balance Depreciation

Depr. Book Value Expense at End for Year of Year

$ 9,600.00 15,360.00 18,816.00 20,889.60

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