Depreciation Accounting

Depreciation Accounting Depreciation Accounting In ordinary language depreciation refers to decrease decrease in the value of a fixed asset. It can be defined as “A gradual, continuous, permanent fall in the book value of a fixed asset”.  According  According to W.Pic W.Pickles“! kles“!epreciati epreciation on can be be defined defined as the permanent, permanent, continuing continuing diminution diminution in the "uality, "uantity or the value of an asset” !ifferences bet#een depreciation and fluctuation Depreciation Fluctuation It means decrease It means increase or decrease It is calculated on a fixed asset It is calculated on current asset It is calculated on book value It is calculated #ith reference to market price It is temporary It is permanent It occurs due to operation of It occurs due to usage mechanism of demand and supply Causes of Depreciation $. Wear Wear and tear or conti continuou nuous s usage usage %. &fflux &fflux of time time or or passa passage ge of of time time '. (bsolescence (bsolescence or getting getting outdated outdated or or out of of fashion fashion or obsolete obsolete ). &xhaustion &xhaustion or depletion of #asting #asting assets assets like oil fields, fields, mines etc *. Permanent Permanent fall in the market value of certain certain fixed fixed assets assets •

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Reasons for charging depreciation $. +o find find out out true profit profit or loss loss of a busin business ess %. +o find out out the correct financial financial position position of a business business '. +o provide provide for sufficien sufficientt funds for the the replacement replacement of a fixed fixed asset at the end of its useful useful life Factors to be taken into account for calculating depreciation $. ost of the asset-co asset-cost st of purchase purchase  freight freight or carriage  installation installation or erection erection charges/ charges/ %. &sti &stima mate te life life '. 0esidua 0esiduall value value or scrap scrap value value or breaku breakup p value value Methods of charging depreciation +here are different methods of charging depreciation. 1o#ever follo#ing methods are covered under  our syllabus $. (riginal cost cost method or fixed installment installment method method or e"ual e"ual installment installment method or straight straight line method %. Written do#n do#n value value method or diminishing diminishing balance balance method method or reducing reducing balance balance method '. Annu Annuit ity y meth metho od ). 0eva 0evalu luat atio ion n metho method d *. 2ink 2inkin ing g fund fund met metho hod d 3. Insur Insuranc ance e polic policy y meth method od ORIGINAL COS M!"OD

Depreciation Accounting 4nder this method depreciation is calculated at a fixed percentage on the original cost of the asset. In other #ords, depreciation is calculated on the original cost of asset. 1ence this method is kno#n as original cost method. As depreciation is calculated on the original cost of the asset the amount of depreciation remains fixed year after year. +herefore this method is also kno#n as fixed installment method. 5esides the amount of total depreciation is e"ually spread over the life of the asset for this reason this method is also kno#n as e"ual installment method or straight line method. +his method is generally follo#ed in case of such fixed assets #hich do not have much repairs or rene#als etc. &xample6 furniture, patents, trade marks, copyrights, short leases etc., +his method is recogni7ed by Income +ax Act $83$. !epreciation9ost of the assetscrap value &stimated life :ournal entries Date

#articulars LF For charging depreciation !epreciation a;c