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PRESENTED BY :ANUSHA GUPTA SARTHAK GUPTA SHEENAM NAGPAL TARUNPREET SINGH

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 32 accounting


standards referred to as Indian Accounting Standards or IAS. The Accounting Standard (AS) 6, Depreciation Accounting, issued by the ICAI.

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.

DEPRECIABLE ASSET
Are expected to be used

USEFUL LIFE
The period over which a

during more than one accounting period.


Have a limited useful life.
Held by an enterprise for

depreciable asset is expected to be used by the enterprise.


The number of production

or similar units expected

use in the production or supply of goods and services.

to be obtained from the


use of the asset by the enterprise.

IFRS VS GAAP
IAS 16 of IFRS mandates review of useful life, residual

value and depreciation method at each year end while AS 6 does not specify any such requirement.

Biological assets are recognised, and dep is calculated by

reducing on the dep base {cost estimated sale value} while in


indian gap, there is nothing provided for biological assets.

If an intangible asset is acquired in a business combination, the cost is the fair value at the acquisition date. The intangible

is recorded by the acquirer irrespective of whether the asset


had been recognised by the acquiree before the business combination or not. While under Indian GAAP, If an intangible asset is acquired in an amalgamation in the nature of purchase, the same should be accounted at cost or fair value if the cost/fair value can be reliably measured. If the same is not reliably measurable it is included as a part of goodwill. Intangible is recorded even if that intangible asset had not been recognised in the financial statements of the transferor

DEPRECIATION
CAUSES

NEED

FACTORS
Total cost of the asset. Estimated useful life of the asset. Estimated scrap value. Chances to obsolescence. Addition to assets. Legal provision.

For determination of net By contrast profit or net loss. By expiry of time For showing asset at fair By obsolescence and true value in the By depletion balance sheet. Permanent fall in price Provision of funds for By abnormal factors replacement of assets. Ascertaining accurate cost of production. Distribution of dividend out of profit only.

CAUSES
INTERNAL CAUSES:
Wear and tear
Depletion

EXTERNAL CAUSES:
Obsolescence Passage of time

ACCIDENT

PERMANENT FALL IN PRICE

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.

FACTORS IN DETERMINATION OF DEPRECIATIONand installation Original cost of fixed asset i.e., purchase price plus freight
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.

METHODS OF DEPRECIATION
1. Straight Line 2. Written Down Value 3. Sum Of Years Digits 4. Units of Production

5. Machine Hour Rate

STRAIGHT LINE METHOD


Most Easiest method to apply. Based on the assumption of Equal Usage. Also known as fixed installment method. Makes comparisons of profits easy. Suitable for those assets whose useful life can be estimated.

STRAIGHT LINE METHOD


Amount Of Depreciation
= Cost Estimated Scrap Value Estimated Useful Life Depreciation Rate = Amount of Depreciation Cost x 100

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.

WRITTEN DOWN VALUE METHOD


Rate of Depreciation = 1 (Residual price) ^ (1/n) Cost

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

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 results in the deductions shown below:

UNITS OF PRODUCTION METHOD


The units of production method of depreciation is based on an

assets 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.

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

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.

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

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.

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.

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

b) For charging depreciation to profit and loss account

Profit & Loss A/c

Dr

To Depreciation A/c

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.

Date

Books of Singhania and Bros. Journal


Particulars
L Debit .F Amount . Rs.

Credit Amount Rs.


5,00,000

2002 Apr. 01 Apr. 01

Plant A/c Dr. To Bank A/c (Purchased plant forRs.5,00,000) Plant A/c Dr. To Bank A/c (Expenses incurred on installation) Depreciation A/c Dr. To Plant A/c (Depreciation charged on asset) Profit and Loss A/c Dr. To Depreciation A/c (Depreciation debited to profit and loss account)

5,00,000

50,000 50,000 54,000 54,000 54,000 54,000

2003 Mar. 31 Mar. 31

Plant Account
Date Particulars
J. F.

Amount Date Rs.


5,00,000
2003 MAR 31

Particulars

J . F .

Amount Rs.

2002 Apr. 01

BANK

DEPRECIATION

54,000

BANK(installation expenses)

50,000
5,50,000

BALANCE c/d

4,96,000
5,50,000

2003 apr1

BALANCE b/d

4,96,000

2004 MAR 31

DEPRECIATION
BALANCE c/d

54,000
4,42,000 4,96,000

4,96,000
2004 Apr 1

BALANCE b/d

4,42,000

DEPRECIATION ACCOUNT
DATE
PARTICULAR S
J.F.

AMOUNT Rs.

DATE

PARTICULAR S Profit and Loss

J.F.

AMOUNT Rs.

2003 Mar. 31 2004 Mar. 31

Plant

54,000

2003 Mar. 31 2004 Mar.31

54,000

Plant

54,000

Profit and Loss

54,000

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).

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

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.

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.