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Depreciation

Depreciation. Depreciation accounting and applies to all depreciable assets, except the following :- Forests, plantations and similar regenerative natural resources;

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Depreciation

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  1. Depreciation

  2. Depreciation accounting and applies to all depreciable assets, except the following :- • Forests, plantations and similar regenerative natural resources; • Wasting assets including expenditure on the exploration for and extraction of minerals, oils, natural gas and similar non-regenerative resources; • Expenditure on research and development; • Goodwill; • Live stock. • It does not apply to land unless it has a limited useful life for the enterprise

  3. 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. • To charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of he asset. • Depreciation includes amortization of assets whose useful life is predetermined.

  4. Depreciation • Permanent Decrease in the value of a fixed asset, • A portion of the total cost of fixed asset used/consumed • Within an accounting period. • Different accounting policies for depreciation are adopted by different enterprises. • Disclosure of accounting policies for depreciation followed by an enterprise is necessary • Quantum of depreciation involves the exercise of judgment by management in the light of technical, commercial, accounting and legal requirements.

  5. Depreciable assets • Expected to be used during more than one accounting period; • Have a limited useful life; and • Held by an enterprise for • use in the production or supply of goods and services, • for rental to others, or • for administrative purposes and • not for the purpose of sale in the ordinary course of business.

  6. Historical cost: • Acquisition, installation and commissioning as well as additions or improvement cost. • Useful life: • the period over which a depreciable asset is expected to be used by the enterprise; or • the number of production or similar units expected to be obtained from the use of the asset by the enterprise. • Depreciable Amount: • Historical cost, or other amount substituted for historical cost in the financial statements, less the estimated residual value.

  7. Depreciation: Any addition or extension to an existing asset • A capital nature • An integral part of the existing asset, depreciated over the remaining useful life of that asset. • At the rate which is applied to an existing asset. • A separate identity and is capable of being used after the existing asset is disposed of, • Depreciated independently on the basis of an estimate of its own useful life.

  8. Residual Value • If insignificant, it is normally regarded as nil. • If significant, it is estimated at the time of acquisition/installation, or at the time of subsequent revaluation of the asset. • Determining the residual value would be the realizable value of similar assets which have reached the end of their useful lives and have operated under conditions similar to those in which the asset will be used.

  9. Disclosure • Depreciation methods used, • Total depreciation for the period for each class of assets, • Gross amount of each class of depreciable assets and the related accumulated depreciation • A change in the method of depreciation is treated as a change in an accounting policy and is disclosed accordingly.3

  10. Methods for Depreciation • Fixed installment method • Diminishing Balance Method

  11. Straight Line Method • Also known as Fixed Installment Method • Depreciation is charged evenly every year during the effective life of the asset. • The amount of depreciation is fixed for each financial year. • Value of fixed asset reduced evenly until it reaches its scrap value. • Suitable for assets which are expected to render equal or uniform services

  12. Depreciation = Original Cost of the asset – estimated scrap value Estimated life of the asset in years

  13. Diminishing Balance Method • Written Down Value method or Reducing Balance method • Depreciation is charged on the book value of an asset every year • Amount of depreciation goes on decreasing every year. • Repairs and maintenance cost and depreciation are charged equitably.

  14. Disposal of Fixed Asset • Fixed asset is eliminated from the financial statement on its disposal. • Gains and losses arising out of the disposal are recognized in P/L a/c.

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