Depreciation in

1. PRESENTED BY :-
ANUSHA GUPTA
SARTHAK GUPTA
SHEENAM NAGPAL
TARUNPREET SINGH

2. ACCOUNTING STANDARDS
The statements of code of practice of the regulatory accounting
bodies that are to be observed in the preparation and presentation of
financial statements. The Institute Of Chartered Accountants Of
India (ICAI) has formulated and issued, the following 28 accounting
standards referred to as Indian Accounting Standards or IAS.
The Accounting Standard (AS) 6, “Depreciation Accounting”,
issued by the ICAI.

3. AS-6: DEPRECIATION
ACCOUNTING
According to accounting standard (AS 6)
“Depreciation is a measure of the wearing out,
consumption or other loss of value of a depreciable asset
arising from use effluxion of time or obsolescence through
technology and market changes.”

4. DEPRECIABLE ASSET USEFUL LIFE
Are expected to be used The period over which a
during more than one depreciable asset is
accounting period. expected to be used by the
enterprise.
Have a limited useful life.
The number of production
Held by an enterprise for
or similar units expected
use in the production or
to be obtained from the
supply of goods and use of the asset by the
services. enterprise.

6. CAUSES
INTERNAL CAUSES:
 Wear and tear
 Depletion
EXTERNAL CAUSES:
 Obsolescence
 Passage of time
ACCIDENT
PERMANENT FALL IN PRICE

7. NEEDS
 Determination of net profit or net loss.
 Showing assets at fair and true value in the balance
sheet.
 Provision of funds for replacement of assets.
 Ascertaining accurate cost of production.
 Distribution of dividend out of profit only.
 Avoiding over payment of income tax.

8. FACTORS IN
DETERMINATION OF
DEPRECIATION
Original cost of fixed asset i.e., purchase price plus freight and installation
expenses.
Estimated amount of expenditure on repairs during the useful life.
Estimated useful life of asset after which it will be discarded.
Estimated residual or scrap value.
Possibility of obsolescence.
Interest on investment-the amount invested on purchase of asset, if it had
been invested in some other investment what interest would have been
earned.

9. 1. Straight Line
2. Written Down Value
3. Sum Of Years Digits
4. Units of Production
5. Machine Hour Rate

10. STRAIGHT LINE METHOD
 Most Easiest method.
 Based on the assumption of Equal Usage.
 Also known as fixed installment method.
 Makes comparisons of profits easy.
 Mainly suitable for those assets whose useful life can be
estimated.

11. STRAIGHT LINE METHOD
Amount Of Depreciation
= Cost – Estimated Scrap Value
Estimated Useful Life
Depreciation Rate
= Amount of Depreciation x 100
Cost

12. WRITTEN DOWN VALUE
METHOD
Depreciation is charged at a fixed rate.
Depreciation is Charged on reducing balance.
Also known as Diminishing Value Method.
Based on the assumption that benefits from assets go on
diminishing with the passage of time.
Widely accepted by Income Tax Act.

13. WRITTEN DOWN VALUE
METHOD
Rate of Depreciation = 1 – (Residual price) ^ (1/n)
Cost

14. SUM OF YEARS DIGITS
METHOD
This method requires a fraction to be computed each year, which
is applied against the depreciable amount. The numerator is
the number of years left to be depreciated and the denominator
is the sum of the years’ digits of the depreciable life.
Amount of Depreciation. = (Cost - Salvage Value) x Fraction

15. SUM OF YEARS DIGITS
METHOD
An automobile used in business costs $10000 and has a four-
year depreciable life. Sum-of-the-years’-digits depreciation resul
ts in the deductions shown below:

16. UNITS OF PRODUCTION
METHOD
The units of production method of depreciation is based on an
asset’s usage, activity, or parts produced instead of the passage
of time. Under the units of production method, depreciation
during a given year will be very high when many units are
produced, and it will be very low when only a few units are
produced.

17. UNITS OF PRODUCTION
METHOD
Depreciation rate / unit
= [Cost of Asset – Scrap Value] / Total Estimated Production
Depreciation
= No of units produced in the year x Rate/unit

18. MACHINE HOUR RATE
METHOD
This method is based on the number of hours an asset is used.
This method allows for more depreciation during busy period
and vice versa
Except in rare cases, it is difficult to apply this method as total
operating hours cannot be estimated with any degree of
accuracy.

19. MACHINE HOUR RATE
METHOD
a. Depreciation rate / hour
= [Cost of Asset – Scrap Value] / Total Estimated Hours
b. Depreciation = Hours in the year x Rate/hour

20. PROVISION FOR
DEPRECIATION ACCOUNT
Provision for Depreciation account is designed to
accumulate the depreciation provided on an asset in a
separate account generally called “Provision For
Depreciation “ or “Accumulated Depreciation Account”.

21. BASIC CHARACTERTICS
Asset account continues to appear at its original cost year after
year over its entire life;
Depreciation is accumulated on a separate account instead of
being adjusted in the asset account at the end of each
accounting period.

22. JOURNAL ENTRIES
1. For recording purchase of asset
Asset A/c Dr
To Bank/Vendor A/c
2. Following two journal entries are recorded at the end of each year:
a) For crediting depreciation amount to provision for depreciation
account
Depreciation A/c Dr
To Provision for depreciation A/c

23. b) For charging depreciation to profit and loss account
Profit & Loss A/c Dr
To Depreciation A/c

24. Example of Singhania and Bros.
M/s Singhania and Bros. purchased a plant for Rs. 5,00,000 on April,
01 2002, and spent Rs. 50,000 for its installation. The salvage value
of the plant after its useful life of 10 years is estimated to be Rs.
10,000. Record journal entries for the year 2002-03 and draw up
Plant Account and Depreciation Account for first three years given
that the depreciation is charged using straight line method if:
(i) The books of account close on March 31 every year; and
(ii) The firm charges depreciation to the asset account.

25. Books of Singhania and Bros.
Date
Journal
Particulars L. Debit Credit
F. Amount Amount
Rs. Rs.
2002 Plant A/c Dr. 5,00,000
Apr. 01 To Bank A/c 5,00,000
(Purchased plant forRs.5,00,000)
Apr. 01 Plant A/c Dr. 50,000
To Bank A/c 50,000
(Expenses incurred on installation)
2003 Depreciation A/c Dr. 54,000
Mar. 31 To Plant A/c 54,000
(Depreciation charged on asset)
Mar. 31 Profit and Loss A/c Dr. 54,000
To Depreciation A/c 54,000
(Depreciation debited to profit and
loss account)

26. Plant Account
Date Particulars J. Amount Date Particulars J
.
Amount
F.
Rs. F Rs.
.
2002 BANK 5,00,000 2003 DEPRECIATION 54,000
Apr. MAR 31
01
BANK(installation 50,000 BALANCE c/d 4,96,000
expenses)
5,50,000 5,50,000
2003 BALANCE b/d 4,96,000 2004 DEPRECIATION 54,000
apr1 MAR 31
BALANCE c/d 4,42,000
4,96,000 4,96,000
2004 BALANCE b/d 4,42,000
Apr 1

27. DEPRECIATION ACCOUNT
DATE PARTICULAR J.F. AMOUNT DATE PARTICULAR J.F. AMOUNT
S Rs. Rs.
S
2003 Plant 54,000 2003 Profit and Loss 54,000
Mar. Mar.
31 31
2004 Plant 54,000 2004 Profit and Loss 54,000
Mar. Mar.31
31

28. DISPOSAL OF ASSET
Disposal of asset can take place either
(a) at the end of its useful life or
(b) during its useful life (due to obsolescence or any other
abnormal factor).

29. JOURNAL ENTRIES
1. For sale of asset as scrap
Bank A/c Dr.
To Asset A/c
2. For transfer of balance in asset account
(a) In case of profit
Asset A/c Dr.
To Profit and Loss A/c
(b) In case of loss
Profit and Loss A/c Dr.
To Asset A/c

30. CONCLUSION
1. It applies to all depreciable assets, except the following items to
which special considerations apply:—
 forests, plantations and similar regenerative natural resources;
 wasting assets including expenditure on the exploration for and
extraction of minerals, oils, natural gas etc.
 expenditure on research and development;
 goodwill and other intangible assets;
 live stock.

31. This standard also does not apply to land unless it has a limited
useful life for the enterprise.
2. Different accounting policies for depreciation are adopted by
different enterprises.
Disclosure of accounting policies for depreciation followed by
an enterprise is necessary to appreciate the view presented in the
financial statements of the enterprise.