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m  ´depreciation may be

defined as the permanent and


continuous diminution in the
quality, quantity or value of an
asset.

CARTER: ´ 

  

       


From any cause

Ms.Lakshmi Rawat,M.Com.,MBA,(M.Phill.)
AICPA: AMERICN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS ´
Depreciation accounting is a system of
Accounting which aims to distribute the
cost or other basic value of tangible
capital assts, less salvage value (if
any), over the estimated useful life of
the unit in a systematic and rational
manner. It is a process of n, not of
valuation. Depreciation for the year is
portion of the total charge under such a
system that is allocated to the year.µ

Ms.Lakshmi Rawat,M.Com.,MBA,(M.Phill.)
DEPLETION: It refers to fall in value
of tangible wasting assets like coal
mines timber reserves, oil reserves.

AMORTISATION: It refers to fall in the


value of intangible assets like goodwill,
patents, copyrights, trademarks etc.

OBSOLESCENCE: Occurs when an asset


becomes out of date or it goes out of
use due to news or improved
technology or invention. In this case
decline in value is not due to physical
deterioration but due to new invention
or improved technology.

Ms.Lakshmi Rawat,M.Com.,MBA,(M.Phill.)
ðTo allocate
depreciable costs
ðTo ascertain true and
fair profit and loss
ðTo show correct
financial position
ðTo provide funds for
replacement
ðTo compute tax
liability

Ms.Lakshmi Rawat,M.Com.,MBA,(M.Phill.)
Ms.Lakshmi Rawat,M.Com.,MBA,(M.Phill.)
Ms.Lakshmi Rawat,M.Com.,MBA,(M.Phill.)
@  ri i l st f t  sst
@  sti t r i lif f t  sst
@  sti t rsil r s r vl f
t  sst t t   f its sti t

Ms.Ls i R t,M.C .,MBA,(M.P ill.)


FIXED INSTALMENT METHOD: It is also known as
Fixed Percentage on Original Cost or Equal Instalment
or Straight Line Method.Under this method a fixed
percentage on original cost of the asset is written off
every year so as to reduce the asset account to nil or
its scrap value at the end of the estimated life of the
asset. It is calculated as
= Costðestimated Scrap value/Estimated life of the
asset.
Suitability:
1. Where the life time and scrap value of the asset can
be estimated accurately.
2. Where the repairs and renewals are more or less
uniform or comparatively small
3. The method is suitable in case of Patents, Short
lease and furniture. Not suitable for Plant and
Machinery.
Ms.Lakshmi Rawat,M.Com.,MBA,(M.Phill.)
DIMINISHING BALANCE METHOD: Written down value
method or Reducing Instalment method. Under this
method depreciation is charged at a fixed rate of the
reducing balance of the asset every year.

Suitability: This method can be applied to Plant and


Machinery where repairs are heavy.
Accounting Treatment
1. When the asset is purchased:
Asset a/c ««««.dr.
To Bank a/c
2. Installation charges, reconditioning or ovehauling
expenses incurred on second hand machine should also be
charged to the asset account:
Asset a/c «««..dr.
To Bank a/c

Ms.Lakshmi Rawat,M.Com.,MBA,(M.Phill.)
3. For providing depreciation at the end of the year.
Depreciation a/c ««««.. Dr.
To Asset a/c
(Note: If the asset is sold depreciation should be calculated
up to the date of the sale of the asset)
4. For transfer of depreciation to Profit and loss a/c
Profit and Loss a/c ««««.Dr.
To Depreciation a/c
5. For the amount realized on the sale of asset
Bank a/c «««««««««.Dr.
To asset a/c
6. For the loss on sale of asset.
Profit and Loss a/c «««..Dr.
To asset a/c
(Note: the above entry will be reversed in case of profit Loss
or profit on sale is to be ascertained by finding the difference
between the book value of the asset on the date of sale and
the amount realized from, the sale of asset.

Ms.Lakshmi Rawat,M.Com.,MBA,(M.Phill.)
2   : This method is based on the principle that
when an asset is used in a business, the total loss of the
business during the life of the asset is not only the original
cost of the asset, but also the interest on the amount
invested in acquiring the asset.
Therefore, under this method, not only the original cost of
the asset, but also the interest on the money invested in the
asset is written off as depreciation over the life time of the
asset.
Every year Asset a/c is debited and Interest a/c credited at
the fixed rate on the opening balance of the asset. The
interest credited will not be constant every year. Depreciation
is charged every year by debiting dep. a/c and crediting asset
a/c.
Ms.Lakshmi Rawat,M.Com.,MBA,(M.Phill.)
r
   Under this method not only
depreciation is charged on the asset, but provision is also
made for the purchase of a new asset at the end of the life of
the old asset. The amount written off as ¶Depreciation· every
year is kept aside and invested in easily realizable securities.
The interest received is also invested.
The asset is shown on the Balance sheet, every year at its
original value. Sinking fund is shown on the liabilities side and
sinking fund investments is shown on the assets side of
balance sheet.
Accounting Treatment:
1. For providing annual depreciation
Depreciation a/c ««««dr.
To Depreciation Fund Account.
2. For investing the amount of depreciation
Depreciation fund investment a/c««.dr.
To Bank
3. Subsequent years
Bank a/c ««««««..dr.
To dep. Fund a/c.

Ms.Lakshmi Rawat,M.Com.,MBA,(M.Phill.)
     
This method is
similar to the Depreciation Fund Method,
the difference being that instead of
purchasing investments an insurance
policy is taken which will fetch at the end
of the fixed period the required amount.
Premiums have to be paid at the beginning
of the year. No entry is made for interest,
as interest will not be received from
insurance company.

Ms.Lakshmi Rawat,M.Com.,MBA,(M.Phill.)
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Ms.Lakshmi Rawat,M.Com.,MBA,(M.Phill.)
   

  
 
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Ms.Lakshmi Rawat,M.Com.,MBA,(M.Phill.)

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