Autonomic nervous system: – Depreciation is the disbursal beared or forfeit made for the benefit obtained from a fixed plus during a period of clip. It is allocated so as to bear down a just part of the depreciable sum in each accounting period during the expected utile life of the plus. It is allocated so as to bear down a just part of depreciable sum in each accounting period during the expected usage of life of the plus.
Depreciation is a step of have oning out, ingestion or other loss of value of a depreciable plus originating from usage, transition of clip, obsolescence through engineering and market alterations. Depreciation is the distribution of the entire cost of plus over its utile life.
Q ) What are the Different methods of valuing depreciation?
Ans- Straight Line / Equal Instalment Method-
This is the most popular and normally used method because of its consistence and simpleness. It requires allotment of an equal sum to each of the periods. Therefore every twelvemonth the plus is written down by the same sum. This sum is such that the book value of the plus may be may be reduced to zero ( 0 ) or its residuary value as the instance may be at the terminal of its life.
Decreasing Balance Method-
In this method a fixed rate on the decreased balance of the peculiar plus is charged as depreciation every twelvemonth. Over the life of the plus the sum of depreciation charged every twelvemonth decreases as a changeless per centum rate is applied to the written down value. The premise in this method is that the maximal loss in the assets occurs in the initial old ages as compared to its ulterior old ages of utile life.
Sinking Fund Method-
In this method along with Depreciation proviso for replacing of the plus is besides taken into history. This method is based on present values and a fund is created by debiting Depreciation A/c and crediting droping fund A/c.
Insurance Policy Method-
This method is similar to droping fund method but, alternatively of puting the sum in the securities, the sum is used in paying the premium on a policy taken out with a insurance company.
Sum-of-the Year ‘s Digits Method-
Here, it is assumed that the more depreciation should be charged in the early old ages of the life of the plus. Approximately 2/3rd of the cost is allocated to the 1st half of the plus ‘s estimated economic life.
This method takes into consideration the clip value of money and chance cost of capital locked up in the plus. Here, the entire sum of depreciation written off during the life of the plus is equal to the net cost of the plus plus involvement calculated on the cut downing balance.
Reappraisal Method- This method is used for composing off a fixed plus to its current value.
This method is an accounting for natural resources ( eg, mines, preies, etc ) instead than accounting for depreciation. These sorts of assets can non be depreciated but can bit by bit be depleted.
Machine Hour Rate Method-
This is a method in which the one-year machine hours in usage is compared with entire awaited machine hours over the life of the machine for the intent of supplying depreciation..
Depreciation & A ; Repairs Fund Method-
In this method entire care costs are removed for the the full life of the plus and added to its capital cost in order to acquire a composite figure which is divided by old ages of life of the plus.
In relation to the above some of import points are to be noted: –
The choice of the method is based on type of plus, nature of its usage & A ; the fortunes predominating in the concern.
As per ICAI counsel note on AS-6, a company may follow different methods of depreciation for different types of assets provided the same methods are invariably followed every twelvemonth in footings of sec 205 ( 2 ) of the Companies Act.
There may besides be a alteration in the method of depreciation during the utile life of a depreciable plus.
Q ) How is Depreciation Calculated?
Autonomic nervous system: – Accounting for depreciation is compulsory in nature as per AS-6 and is to be consistently allocated. Systematic allotment means any method of bear downing depreciation which gives systematic disbursals on assets. There are two methods of systematic allotment which are widely accepted. They are ( one ) Equal Instalment Method & A ; ( two ) Decreasing Balance Method. Generally entities follow Decreasing Balance Method for works, machinery & A ; furniture and Fixed Installment method for edifices.
( I ) Straight Line Method: –
Depreciation = Cost of Asset – Scrap Value
Estimated Life of the Asset
( two ) WDV/ Diminishing Balance Method: –
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Where D= Rate of Depreciation to be charged
R = Scrap value
degree Celsiuss = Cost of Acquisition
n = Number of old ages of utile life
Note: – In the above instances if scrap value is non given so the rate of depreciation can non be calculated under this method.
Apart from the above points there are a few critical facets in computation of depreciation which must be highlighted.
Materiality Factor: –
As per AS-1 accounting policies should be followed for stuff points merely. Items which are non material should be written off immediately.
Example: – Assetss whose value is upto Rs 5000 is written off at one time. Here accounting policies are to handle the material value of the assets. Again when the plus is purchased during the accounting period the clip value must be taken into history.
Again, when the plus is purchased during the accounting period, the clip factor must be kept in head before ciphering depreciation for the twelvemonth of purchase.
When an plus is revalued, depreciation is calculated on the revalued figure in prospective footing.
Change in the method of Depreciation: –
Harmonizing to AS-6 Depreciation method can be changed if required. If the method is changed it is called alteration in accounting policy and it should be done retrospectively. For this purpose the undermentioned revelations are to be made: –
Reasons for alteration of policy:
For better presentation.
For conformity with jurisprudence
For conformity with Accounting Standard.
Consequence of alteration in profitableness
Therefore the consequence for the alteration should be clearly shown in the profitableness statement in retrospective mode. Retrospective consequence means the shortage or excess i.e. , the difference between depreciation computed from the day of the month of purchase of the plus till the day of the month of alteration in method, in the new method and the old method, should be adjusted in the histories by debiting or crediting P/L history as the instance possibly.
Note: As per AS-6, if life of plus or trash value of plus is changed, so the computation for depreciation must be done in prospective footing, i.e. set uping from the day of the month of such alteration and non past history.
Representation in the Fiscal statements: –
The one-year study of Tata Steel ( 20011-12 ) has been taken as a illustration for demoing the representation of depreciation in the Balance Sheet: –
Q ) Why is Depreciation considered as a beginning of fund?
Autonomic nervous system: – Depreciation is a non hard currency disbursal but it is charged against net income merely like salary, rent, etc. As it does non do any escape of hard currency in that peculiar period in which it is charged, some comptrollers prefer to see it as an sum retained in hard currency. It may be believed that this helps the company to construct a fund in hard currency which makes it easy to purchase new and utile assets in the long tally. But the hardcore fact is that the above belief is non at all correct. Depreciation is a part of the entire escape of hard currency already made for geting an plus. It is an internal agreement and it affects the value of the fixed assets and besides the periodic gross. Depreciation does non assist in making or keeping any sort of fund. It decidedly affects periodic gross and sum of revenue enhancement to be paid but it does non affect the creative activity or extinction of any fund.A
Therefore, in a nutshell had the intent of depreciation been to retain financess for replacing of fixed assets it could be achieved by reassigning appropriate sums to militias. The transportation to reserve is an “ appropriation of net income ” . But net income is calculated after ciphering depreciation. So, Depreciation is non a beginning of fund