ACCOUNTING STANDARDS - 6

DEPRECIATION ACCOUNTING

DEPRECIATION

Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, efflux ion of time or obsolescence through technology and market changes

DEPRECIABLE ASSETS
Depreciable assets are assets which (i) are expected to be used during more than one accounting period (ii) have a limited useful life (iii) are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative and not for the purpose of sale in the ordinary course of business. Tangible assets like plant and machinery, furniture, building

Intangible assets like patent, copyrights, trademarks, licenses, etc.

EXCEPTIONS
forests, plantations and similar regenerative natural resources;

wasting assets including expenditure on the exploration for and extraction of minerals, oils, natural gas and similar nonregenerative resources; expenditure on research and development;
goodwill;

live stock.

USEFUL LIFE
Useful life is measured in terms of

Time

Productivity

DEPRECIABLE AMOUNT
Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for historical cost in the financial

statements, less the estimated residual value.

FACTORS AFFECTING ASSESSMENT OF DEPRECIATION

Historical cost includes 1) acquisition 2) installation 3) commissioning 4) additions or improvements

Expected useful life

Estimated residual value

MARKET VALUE
Market value is the price at which an asset would trade in a competitive setting

Market value is not taken into consideration while calculation of depreciation rather calculated on the basis of book-value.

SALVAGE VALUE

Salvage value is the estimated value of an asset at the end of its useful life.

METHODS OF DEPRECIATION
1) STRAIGHT LINE METHOD

Amount of depreciation is fixed. Useful to assets whose service remain uniform throughout the year. For e.g. Furniture & fixtures

2) WRITTEN DOWN VALUE METHOD Rate of depreciation is fixed.

3) ANNUITY METHOD

Depreciation is calculated from annuity table.

METHODS OF DEPRECIATION
4) SINKING FUND METHOD The amount of depreciation created is invested outside. 5) INSURANCE POLICY METHOD Amount of depreciation of each year is paid as an insurance premium. 6) KILOMETRE METHOD Depreciation calculated on the distance run by the transportation means. 7) LABOUR HOUR RATE METHOD Depreciation is calculated on the basis of labour hour worked.

METHODS OF DEPRECIATION

8) GLOBAL METHOD Depreciation is calculated on the sum of all the assets.

9) PRODUCTION UNIT METHOD Mostly used in mines to calculate the depreciation on production. 10) STATUATORY METHOD Depreciation value/rate is fixed by this method.

FACTORS AFFECTING SELECTION OF METHOD

TYPE OF ASSET
NATURE OF USE

CIRCUMSTANCES PREVAILING

REVALUATION OF ASSET
Additions to asset

Calculation of revaluation of asset (add example as hyperlink)

Re computation of depreciation and its effects Treatment of residual value (give examples wherever needed)

APPLICATION OF AS6
DATE PARTICULARS DEPRECITION A/C DR. TO BUILDING A/C [BEING DEPRECIATION CHARGED ON BUILDING] L.F. DEBIT 10,000/10,000 /CRED IT

DATE PARTICULARS TO BAL B/D

J.F.

DEBIT AMT. 100000

DATE

PARTICULARS BYDEPRECIATI ON A/C BY BAL C/D

J.F.

CREDIT AMT. 10,000

___________ 100000

90,000 ____________ 100000

DATE

PARTICULAR S

J.F.

DEBIT AMT.

DATE

PARTICULARS

J.F.

CREDIT AMT.

TO BUILDING A/C

10,000

BY P/L A/C

10,000

DATE

PARTICULARS BUILDING DEPRECIATION

DEBIT 90,000 10,000

CREDIT

Dr. TO DEPRECIATION A/C

Amt. 10,000

Cr.

Amt.

LIABILITIES BUILDING

ASSETS 90,000

Dr.
TO DEPRECIATION A/C

Amt.
10,000

Cr.

Amt.

LIABILITIES BUILDING

ASSETS 90,000

DISCLOSURE IN BALANCE SHEET

Depreciation calculated at book value and not market value Method of depreciation used Any revaluation of asset Any re computation of depreciation Any addition to asset and type of addition

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