The original amount of fixed asset consumed during its period of use It is an expense for services rendered by the fixed asset
Depreciation is gradual It is permanent Occurs on fixed assets not on current assets Is a non-cash item Shown in the P/L a/c as an expense Consequently reduces net profit
Wear and Tear Erosion Obsolescence Depletion
1. Straight Line Method Depreciation remains constant Asset value reduces to scrap Depreciation = Original Cost - Scrap Value Estimated Life
2. Reducing Balance Method/ Diminising Balance Method Percentage depreciation will be given Only method which does not consider scrap
3. Sum of Digits Method TThe digits or the remaining useful life of the asset is calculated TThe digits are added up to get the sum of digits TThe corresponding ratio of digits is then obtained DDepreciation = Original cost --- Scrap value X Ratio
4. Usage Method The usage is calculated every year at a particular rate Multiply the number of hours for which an asset has been used by the rate Depreciation = Original cost - Scrap value X hours of use Estimated life
Asset a/c Provision for depreciation a/c Disposal a/c
Asset a/c Records 4 items Opening balance Closing balance Purchase of asset Sale of asset
Provision for depreciation a/c Simply a book-keeping entry Every year a certain sum is transferred from the P/L a/c to the provision account Money is available to replace the asset at the end of its estimated useful life
Asset Disposal a/c Prepared only on sale of asset Shows the profit or loss on sale of an asset
Q & A