DEPRECIATION.

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DEPRECIATION ACCOUNTING

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Presentation transcript:

DEPRECIATION

MEANING Depreciation A permanent fall in the value of fixed assets arising through wear and tear from the use of those assets in business. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset.

OBJECTIVES OF DEPRECIATION

To ascertain the correct profit and loss: To show the asset at its reasonable value To provide for replacement of an asset. Depreciation is permitted to be deducted from profits for tax purposes. To ascertain the correct cost of production: To show a true and fair view of the financial position:

Causes of Depreciation Internal causes: wear and tear, maintenance, change in production, restriction of production, reduced demand, technical progress & depletion. External causes: obsolescence (Outdated) and efflux ion of time

METHODS OF DEPRECIATION

(Cost - Residual Value) / Useful Life STRAIGHT LINE METHOD Straight line method depreciates cost evenly through out the useful life of the fixed asset. Straight line depreciation is calculated as follows: (Cost - Residual Value) / Useful Life

ITS MERITS … It is a simple method of calculating the depreciation In this method ,assets can be depreciated up to the estimated scrap value. In this method, it is easy to know the amount of depreciation. Every year the profit and loss account is debited by the same amount of depreciation, so there is the same effect on profit and loss account every year

ITS DEMERITS…. With the passage of time, work efficiency of assets decreases and repair expenses increases. Sometimes in this method, the book value of assets become nil, still the asset are used in the business.

DIMINISHING BALANCE METHOD Diminishing balance method is also known as written down value method or reducing installment method. Under this method the asset is depreciated at fixed percentage calculated on the debit balance of the asset which is diminished year after year on account of depreciation.

ITS MERITS… On the expansion and increase in assets the depreciation can be computed easily by this method. This method is accepted under the income tax act.

ITS DEMERITS.. In this method ,the value of assets can never be zero. It is difficult task to ascertain the proper rate of depreciation In this method also, there is no provision of interest on capital invested in use of assets.