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DEPRECIATION
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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. Depreciation is allocated so
as to charge a fair proportion of the
depreciable amount in each accounting period
during the expected useful life of the asset.
Depreciation includes amortisation of assets
whose useful life is predetermined.

This Standard deals with depreciation accounting
and applies to all depreciable assets-
À Tangible assets
À Intangible assets

À Exceptions
(i) Forests, plantations and similar regenerative
natural resources;
(ii) Wasting assets
(iii) Expenditure on research and development;
(iv) Live stock
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ÀInternal causes

ÀExternal causes
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Definition : Depreciation which occurs for certain


inherent normal causes is known as internal
depreciation. The causes of internal
depreciation are :

x Wear and Tear


x Depletion
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Definition : Depreciation caused by some


external reasons is called external depreciation.

xObsolescence
x Passage of time

x Passage of time
  


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Particulars Debit 1) Depreciation on


Balance Machinery @ 10 %.
(IN RS.)
Machinery 50000 2) Depreciate Patent
Patent Rights 25000 Rights by Rs. 4000 .

Furniture 20000
3) Current value of
Furniture is Rs.17000.
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Particulars Amount Dr. Particulars Amount Cr.
(IN RS.) (IN RS.)
To Depr. 5000
On Machinery
To Depr. On 4000
Patent Rights

To Depr. On 3000
Furniture
 
 
Liabilities Amount(IN RS.) Assets Amount(IN RS.)
Machinery:
50000
Less: Depr. @ 45000
10% -> 5000
Patent Rights :
25000
Less: Depr. 21000
4000
Furniture:
20000
Less: Depr. -> 17000
3000


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  §§

À STRAIGHT LINE METHOD

À DIMINISHING BALANCE METHOD


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À Straight-line depreciation is the simplest and
most-often-used technique.

Cost Of Fixed Asset ² Scrap Value


Life Span(Years)
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À For example, a vehicle that depreciates over 5
years, is purchased at a cost of Rs.17,000, and
will have a salvage value of Rs.2000, will
depreciate at Rs.3,000 per year: (Rs.17,000 -
Rs.2,000)/ 5 years = Rs.3,000 annual straight-
line depreciation expense. In other words, it is
the depreciable cost of the asset divided by the
number of years of its useful life.
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À Depreciation methods that provide for a higher
depreciation charge in the first year of an asset's life and
gradually decreasing charges in subsequent years are
called accelerated depreciation methods. Depreciation
methods that provide for a higher depreciation charge in
the first year of an asset's life and gradually decreasing
charges in subsequent years are called accelerated
depreciation methods.

À Annual Depreciation = Depreciation Rate * Book Value at


Beginning of Year
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Suppose a business has an asset with


Rs.1,000 Original Cost, Rs.100 Salvage Value,
and 5 years useful life. First, calculate straight-
line depreciation rate. Since the asset has 5
years useful life, the straight-line depreciation
rate equals (100% / 5) 20% per year. With
double-declining-balance method, as the name
suggests, double that rate, or 40% depreciation
rate is used.
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A company needs to report depreciation


accurately in its financial statements in order to
achieve the following objectives:

À Matching its expenses

À Ensuring the asset values


 

À To Ascertain the Profit or Loss Properly

À To Show the Asset at its Proper Value

À To retain (out of Profits) Funds for Replacement


Is It Mandatory To Charge
Depreciation On Fixed
Assets ?
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Block Particulars Rate in (%)
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