D epriciation

1. Depriciation • Depriciation is a gradual and permanent decrease in the value of assets from any cause. (R.N.Carter) • Depriciation may be defined as permanent and continuing diminution in quality ,quantity or the value of assets. (william pickles)

2. CHRACTERSTICS OF DEPRICIATION • Decrease in the value of assests • Gradual decrease • Process of allocation not of valuation • Permanent decrease in the value of assets

3. Causes of depriciation • Constant use • Effect of time • On expiry of legal rights • Accident • Human mistake • Obsolescence • Fall in price • Depletion

4. Need ,objectives or significance of providing depriciation • To ascertain true profit and loss • Ascertainment of correct cost of production • Presentation of correct economic position • Arrangement of funds for the re-establishment of assests • To prevent the distribution of profits out of capital • To save the income tax

5. Use of depreciation in other related terms • Depreciation- used for physical assets • Amortization- used for intangible assets • Depletion- used for natural resources • Dilapidation- used in contract of lease

6. Factors determining the amount of depreciation • Cost of assets • Estimated useful life of assets • estimated scrap value of assets

7. Methods for recording depreciation • 1. provision for depreciation account is to be maintained . • 2. provision for depreciation account is not to be maintained..

8. Methods for providing depreciation • Fixed installment method • Diminishing installment method • Annuity method • Depreciation fund method • Insurance policy method • Revaluation method • Depletion method

9. Fixed instalment method • A certain and equal amount is deducted annually as depriciation. • Easy method. • Suitable for all type of business. • Value of asset become zero at the end of working life of asset. • Depriciation is shown as a direct deduction from the value of asset in balance sheet.

10. Demerit of fixed instalment • Equal depriciation is charged every year but the efficiency of asset decreases with the passage of time. • No provision for interest on investment on asset. • No provision for replacement. • Difficult to estimate residual value. • Only considers the time duration,not on actual use of asset.

11. Application of fixed installment method • Applicable for those assets on which repair and renewal expenses are very less. • Applicable on those org. where some assets have more repair expenses and some have less expenses.

12. Calculation of depriciation • On the basis of working life of assets= • Depriciation=cost of assets-scrap value/ • estimated SSWlife of asset • On the basis of % = Depriciation = cost of asset * rate/100

13. Diminishing balance method • Depriciation is calculated on the opening balance of asset every year. • Easy calculation of depriciation. • In initial year dep. Is more and repair charges are less and in later year deprication is less and repair is more.so equal effect on profit and loss account. • Value of asset never become zero. • Method is permissible under income tax act 1961.

14. demerit of diminishing balance method • Detrmination of suitable rate is tough. • Value of asset can not be reduced to zero. • No provision for replacement. • No provision for interest. • Dep. Is more in initial year and less in later years. • If less rate is decided then more years are required for amortization of asset but asset ended earlier.

15. Application of method • Applicable on those assets which have more working life like • building • plant • machinery

16. Difference in fixed and diminishing method Fixed instalment Diminishing method • Amount of dep. Remains equal. • Calculated on initial book value. • Book value can be reduced to zero. • Rate of dep is kept lower. • Effect of dep and repair is not equal on p&l a/c. • This method is not approved by income tax authority. • Amount of dep. Reduces every year. • Calculated on written down value. • Bookvalue never become zero. • Rate of dep is kept higher as compared to fixed instalment method. • Effect of dep and repair on p&l a/c is equal. • Approved by income tax authority