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Meaning of Depreciation
2 Gradual decline in the value of asset due
to continuous use.
2 It¶s a permanent process which decreases
the book value of fixed assets.
2 Different terms denote depreciation for
different types of assets-
assets- Depletion,
amortization, obsolescence.
wharacteristics
2 Reduction in value
2 wharged on book value
2 Permanent decrease
2 wharged on fixed assets only
2 Nature
2 Based on forecast
2 Fall in quality and productivity
O
O 

2 §lso known as diminishing or reducing balance method.


2Depreciation is charged at fixed rate on the reducing balance
2 Reducing balance = original cost of the asset ±depreciation
2 It is calculated every year.
2 The depreciation is more in the beginning and the repair
charges are much less.
2 The written down value method (which is also abbreviated
as WDV) is generally used to depreciate fixed asset.


Ä. Easy calculation
2. Equal charge against income
3. No undue pressure in later years
4. Balance of asset is never written off to zero
5. §pproval method by income tax authority
Ô 

Ä. §sset cannot be completely written off


2. Omission of interest factor.
3. Difficulty in determining the rate of depreciation
4. Knowledge of original cost and upto-
upto-date depreciation
not possible
Difference between straight line and written down
method

2 §mount of depreciation
2 Basis of calculating depreciation
2 Zero level
2 wombined effect of depreciation and repairs on P&L a/c
2 Rate of depreciation
2 §pproval of income tax
2 Sustainability
-uestion on written down value
method

§ machinery was purchased on Äst Jan 2005 for


Rs Ä0000 . depreciation has been written off
the machinery account on reducing balance
method for last 3 years @ Ä0%. P.a.
Prepare machinery account and depreciation
account.
O O
  
    
Dr. wr

   


   
 

2005 To Bank §/c Ä0000 2005 By Depreciation Ä000


Jan Ä Dec §/c
3Ä By Balance c/d 9000
Ä0000 Ä0000

2006 To balance 9000 2006 By Depreciation 900


Jan Ä b/d Dec §/c
3Ä By Balance c/d 8Ä00
9000 9000

2007 To balance 8Ä00 2007 By Depreciation 8Ä0


Jan Ä b/d Dec a/c
3Ä By Balance c/d 7290
8Ä00 8Ä00

2008
Jan Ä To balance 7290
b/d
    
Dr. wr

   


   
 

2005 To Machinery Ä000 2005 By profit and loss Ä000


Dec 3Ä §/c Dec §/c

Ä000 Ä000

2006 To Machinery 900 2006 By profit and loss 900


Dec 3Ä §/c Dec §/c

900 900

2007 To Machinery 8Ä0 2007 By profit and loss 8Ä0


Dec 3Ä §/c Dec a/c

8Ä0 8Ä0
-ues- § firm purchased a machinery for Rs.
-ues-
Ä5,000 on Äst june,2009 . On Äst jan,20Ä0
further machinery was purchased for
Rs.Ä0,000.On 3Äst march, 20ÄÄ the
machinery purchased on Äst June was
became obsolete, was auctioned for
Rs.6,000and new machinery was
purchased for Rs.Ä5,000.
Write up the machinery account for first
three years if depreciation is provided for
Ä0% p.a on Reducing Balance Method.
M§w INERY §wwOUNT
Date Particulars §mt. Date Particulars §mt.
2009 2009
Jun Ä To wash §/w Ä  Dec 3Ä By Depreciation  
(a) a/c (a)
Dec 3Ä By Bal c/d (a) Ä 
Ä 
Ä 
20Ä0 20Ä0
Jan.Ä Dec 3Ä By Depreciation
To Bal b/d (a) Ä  a/c
Jan Ä
To wash a/c Ä (a)Ä,425
(b) (b)Ä,000
(b)Ä,000 
Dec 3Ä By Bal c/d
(a)Ä2,825
(b)9,000
(b)9,000 Ä
 
 
Date Particulars §mt. Date Particulars §mt.

20ÄÄ 20ÄÄ
Jan Ä To Bal b/d Mar 3Ä By wash a/c (a) 6,000
(a)Ä2,825 Mar 3Ä By Profit & loss a/c 6,504
(b)9,000
(b)9,000 2Ä,825 (loss on sale )
Mar 3Ä By Depreciation a/c 32Ä
Ä To wash a/c Ä5,000 (a)
(c) Dec 3Ä By Depreciation a/c
(b) 900
(c)Ä,Ä25
(c)Ä,Ä25 2,025
Dec 3Ä By Bal c/d
(b) 8Ä00
(c) Ä3875 2Ä975

36,825 36,825
Working Note:
Dec.3Ä, 2009-
2009- Depreciation (a)
=Rs.Ä5000*Ä0/Ä00
=Rs.Ä500*6/Ä2
=Rs.750
Dec.3Ä, 20Ä0-
20Ä0- Depreciation
(a)= Rs.Ä4,250*Ä0/Ä00
=Rs.Ä,425
(b)= Rs.Ä0,000*Ä0/Ä00
=Rs.Ä,000
Total Depreciation= Ä,000+Ä,425
=2,425
Mar 3Ä, 20ÄÄ-
20ÄÄ- Depreciation
(a)=Ä2,825*Ä0/Ä00
= Ä283*3/Ä2
= 32Ä
Mar 3Ä,20ÄÄ ±
Loss from sale of machinery (a)=
Ä2,825-- (6,000 + 32Ä)
Ä2,825
=6,504
Dec 3Ä,20ÄÄ ± Depreciation
(b)=9000*Ä0/Ä00
=900
(c)=Ä5,000*Ä0/Ä00
=Ä,500*9/Ä2
=Ä,Ä25
Total Depreciation= 900+Ä,Ä25

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