good ppt

1. Depreciation

2. Depreciation may be defined as the
permanent and continuing diminution in the
quality or the value of an asset.
-William Pickles
Depreciation is the gradual and permanent
decrease in the value of an asset from any
cause.
-R.N. Carter.

3. The Objective of Depreciation
•According to the matching concept, revenues
should be matched with expenses in order to
determine the accounting profit.
•The cost of the asset purchased should be
spread over the periods in which the asset will
benefit a company.

4. In Accounting Depreciation is defined as
‘allocation of the depreciable amount of an asset over
its estimated life’.
•Depreciation is fall in the value of the fixed assets
(except Land).
•Depreciation is charged as an expense in the Profit and
Loss Account in order to spread the cost of a fixed asset
over the asset’s useful life.
•Depreciation is charged on a continuous basis. Once the
depreciation is charged, it must be charged on regular
basis in the succeeding period also.

5. Depreciation Methods
(A) Straight Line Method
(B) Reducing Balance Method/Diminishing
Balance Method
(C) Revaluation Method
(D) Sum of Digits Method/Sum of The Years’
Digits Method
(E) Production Output Method/Units of
Production Method

6. Straight line or Fixed Installment Method
A fixed or equal amount is to be charged as depreciation
every year during the life time of the asset. The amount
of depreciation remains equal from year to year. The
expected lifetime of the asset is calculated and the cost
of the asset is spread over its lifetime.
Depreciation = Cost of Asset – Estimated Residual Value
Estimated Useful Economic Life

7. Useful Economic Life
•Useful economic life is not equal to physical life
•It is the period over which the present owner intends to
use the asset
Residual Value
•It is the amount received after disposal of the asset
Cost of asset - Residual value = Total amount to be
depreciated

8. Cost of asset 1200
Residual/scrap/salvage value 200
Estimated useful life 4 years
Annual charge for depreciation
= 1200-200
4
= 1000
4
=250
EXAMPLE

9. MERITS
• Easy to apply
• Useful for assets which depreciate uniformly over
time.
DEMERITS
• Does not take into account effective utilisation of
the asset. Same amount charged irrespective of
usage.
• Normally asset requires larger maintenance and
repair in later years which is ignored.

10. Reducing Balance Method / Diminishing
Balance Method/WDV Method
According to the diminishing value method,
depreciation is charged on reducing balance on a fixed
rate. Depreciation, in this case, is charged over the
useful life of an asset over its written down value. The
percentage, at which depreciation is charged, remains
fixed, however, the amount of depreciation goes on
diminishing year after year.

11. Annual Depreciation = Net Book Value x
Depreciation Rate
= (Cost – Accumulated Depreciation) x
Depreciation Rate

12. Example
Calculate Depreciation @ 40% under WDV
method for an asset costing $30,000 with
useful life of 5 years and a salvage value of
Rs.3000

14. Advantages of Diminishing Value Method are:
• More practical and easy to apply.
• Decreasing charge for depreciation cancels
out increasing charges for repairs.
• This method is applicable for income tax
purposes.

15. Depreciation
Revaluation Method
For some small - value assets such as loose tools
= Value at the beginning of the year (Opening balance) +
Purchases in the year – Value at the end of the year (Closing balance)

16. Sum of Digits Method / Sum of The Years’ Digits Method
Under this method, annual depreciation is determined by
multiplying the depreciable cost by a series of fractions
based on the sum of the asset's useful life digits.
It provides higher depreciation to be charged in the early
years, and lower depreciation in the later periods.
The sum of the digits can be determined by using the
formula (n2+n)/2, where n is equal to the useful life of the
asset.

17. Depreciation should be charged as
follows:
Year 1 (Cost – Residual value) x n / Sum of digits
Year 2 (Cost – Residual value) x (n-1) / Sum of digits
Year 3 (Cost – Residual value) x (n-2) / Sum of digits
Year 4 (Cost – Residual value) x (n-3) / Sum of digits
Year n (Cost – Residual value) x 1 / Sum of digits
With diminishing years of
life to run

18. EXAMPLE
Cost of asset $9,000
No scrap value
Estimated useful life 5 years
Sum of digits = 5(5+1) / 2 = 15
Depreciation charge:
Year 1 $9,000 x 5/15 = $3,000
Year 2 $9,000 x 4/15 = $2,400
Year 3 $9,000 x 3/15 = $1,800
Year 4 $9,000 x 2/15 = $1,200
Year 5 $9,000 x 1/15 = $ 600

19. Production Output Method / Units of
Production Method
Depreciation is computed with reference to
the use or output of the asset in that period.

20. EXAMPLE
A company bought a machine at $10,000 and expects that the machine
would run for 2,000 hours during its life. It is expected to have no scrap
value.
Depreciation charge:
Year 1 800 hours
Year 2 600 hours
Year 3 350 hours
Year 4 250 hours
Year 1 $10,000 x 800/2,000 = $4,000
Year 2 $10,000 x 600/2,000 = $3,000
Year 3 $10,000 x 350/2,000 = $1,750
Year 4 $10,000 x 250/2,000 = $1,250

21. ACCOUNTING FOR DEPRECIATION
The calculation and reporting of depreciation is based upon two
accounting principles:
Cost principle. This principle requires that the Depreciation Expense
reported on the income statement, and the asset amount that is
reported on the balance sheet, should be based on the historical
(original) cost of the asset. (The amounts should not be based on the
cost to replace the asset, or on the current market value of the asset,
etc.)
Matching principle. This principle requires that the asset's cost
be allocated to Depreciation Expense over the life of the asset. In
effect the cost of the asset is divided up with some of the cost being
reported on each of the income statements issued during the life of
the asset. By assigning a portion of the asset's cost to various income
statements, the accountant is matching a portion of the asset's cost
with each period in which the asset is used.

22. Journal Entry for the Depreciation of Fixed
Assets
The depreciation expense is calculated at the
end of an accounting period and is entered as
a journal as follows:
Depreciation Account Debit
Credit Accumulated depreciation

23. Accounting Entry
Double entry involved in recoding depreciation
may be summarized as follows:
Debit Depreciation Expense (Income Statement)
Credit Accumulated Depreciation (Balance Sheet)
Every accounting period, depreciation of asset charged during
the year is credited to the Accumulated Depreciation account
until the asset is disposed. Accumulated depreciation is
subtracted from the asset's cost to arrive at the net book value
that appears on the face of the balance sheet.

24. ABC LTD purchased a machine costing $1000 on 1st January
2001. It had a useful life of three years over which it generated
annual sales of $800. ABC LTD's annual costs during the three
years were $300.

25. Depreciation Expense Account
Debit $ Credit $
2001 Accumulated Depreciation 333.3 2001 Income Statement 333.3
2002 Accumulated Depreciation 333.3 2002 Income Statement 333.3
2003 Accumulated Depreciation 333.4 2003 Income Statement 333.4
Accumulated Depreciation Account
Debit $ Credit $
2001 Balance c/d 333.3 2001 Depreciation Expense 333.3
333.3 333.3
2002 Balance c/d 666.6 2002 Balance b/d 333.3
2002 Depreciation Expense 333.3
666.6 666.6
2003 Balance c/d 1000 2003 Balance b/d 666.6
2003 Depreciation Expense 333.4
1000 1000