Depriciation is a gradual and permanent decrease in the value of assets from any cause RNCarter Depriciation may be defined as permanent and continuing diminution in quality quantity or the value of assets ID: 265145
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Slide1
Depriciation
Depriciation
is a gradual and permanent decrease in the value of assets from any cause. (
R.N.Carter
)
Depriciation
may be defined as permanent and continuing diminution in quality ,quantity or the value of assets. (
william
pickles)Slide2
CHRACTERSTICS OF DEPRICIATION
Decrease in the value of
assests
Gradual decrease
Process of allocation not of valuation
Permanent decrease in the value of assetsSlide3
Causes of depriciation
Constant use
Effect of time
On expiry of legal rights
Accident
Human mistake
Obsolescence
Fall in price
DepletionSlide4
Need ,objectives or significance of providing depriciation
To ascertain true profit and loss
Ascertainment of correct cost of production
Presentation of correct economic position
Arrangement of funds for the re-establishment of
assests
To prevent the distribution of profits out of capital
To save the income taxSlide5
Use of depreciation in other related terms
Depreciation- used for physical assets
Amortization- used for intangible assets
Depletion- used for natural resources
Dilapidation- used in contract of leaseSlide6
Factors determining the amount of depreciation
Cost of assets
Estimated useful life of assets
estimated scrap value of assetsSlide7
Methods for recording depreciation
1. provision for depreciation account is to be maintained .
2. provision for depreciation account is not to be maintained..Slide8
Methods for providing depreciation
Fixed installment method
Diminishing installment method
Annuity method
Depreciation fund method
Insurance policy method
Revaluation method
Depletion methodSlide9
Fixed instalment method
A certain and equal amount is deducted
annually as
depriciation
.
Easy method.
Suitable for all type of business.
Value of asset become zero at the end of working life of asset.
Depriciation
is shown as a direct deduction from the value of asset in balance sheet.Slide10
Demerit of fixed instalment
Equal
depriciation
is charged every year but the efficiency of asset decreases with the passage of time.
No provision for interest on investment on asset.
No provision for replacement.
Difficult to estimate residual value.
Only considers the time
duration,not
on actual use of asset.Slide11
Application of fixed installment method
Applicable for those assets on which repair and renewal expenses are very less.
Applicable on those org. where some assets have more repair expenses and some have less expenses.Slide12
Calculation of depriciation
On the basis of working life of assets
=
Depriciation
=cost of assets-scrap value/
estimated
SSWlife
of asset
On the basis of %
=
Depriciation
= cost of asset * rate/100 Slide13
Diminishing balance method
Depriciation
is calculated on the opening balance of asset every year.
Easy calculation of
depriciation
.
In initial year dep. Is more and repair charges are less and in later year
deprication
is less and repair is
more.so
equal effect on profit and loss account.
Value of asset never become zero.
Method is permissible under income tax act 1961.Slide14
demerit of diminishing balance method
Detrmination
of suitable rate is tough.
Value of asset can not be reduced to zero.
No provision for replacement.
No provision for interest.
Dep. Is more in initial year and less in later years.
If less rate is decided then more years are required for amortization of asset but asset ended earlier.Slide15
Application of method
Applicable on those assets which have more working life like
building
plant
machinerySlide16
Difference in fixed and diminishing method
Fixed
instalment
Diminishing method
Amount of dep. Remains equal.
Calculated on initial book value.
Book value can be reduced to zero.
Rate of
dep
is kept lower.
Effect of
dep
and repair is not equal on
p&l
a/c.
This method is not approved by income tax authority.
Amount of dep. Reduces every year.
Calculated on written down value.
Bookvalue
never become zero.
Rate of
dep
is kept higher as compared to fixed
instalment
method.
Effect of
dep
and repair on
p&l
a/c is equal.
Approved by income tax authority