AS – 6: Depreciation Accounting

What is Depreciation?
A company has purchased a machine for 10 lakhs and used it for 2 years.
Now it wants to sell the machine for 10 lakhs. Can it do so?
Definitely not, because the machine is used one. It can find a lot of buyers if
the price is less than 10 lakhs. So, there is a loss in the value of asset by usage,
passage of time, wear and tear etc,
As per the principles of accounting, this loss has to be provided by debiting
P&L A/C. This provision for loss is known as “Depreciation”

So, Depreciation has to be provided (i.e. provision for loss) on “Depreciable assets”

If depreciable asset is Disposed off

Discarded
Demolished
Destroyed, then
Surplus or deficiency is credited or charged to P&L A/C.
 The estimation of useful life of depreciable asset is a matter of judgment based in
the experience of the enterprise with similar assets. There may be conflict
between the estimate of useful life by the management and that specified in the
statute (Companies Act).

When management estimate of useful life is

Longer than specified in statue Shorter than specified in

(i.e. Schedule XIV) statue (i.e. Schedule XIV)

Means that the company is
charging a lower rate,
it is not allowed to charge a lower
rate than Schedule XIV
Means that the company is charging a higher rate,
it is allowed to charge a higher rate than Schedule
XIV, provided the BOD concluded after taking
into account commercial and technical factors,
since the financial statements must reflect a true
and fair view.

Can a company adopt different methods of depreciation for different types of

assets?
As per ICAI guidance note, a company may adopt or follow different
methods of depreciation, for different types of assets, provided the same methods
are consistently adopted every year.

A change in depreciation method is permissible in the following situations:

1. Compliance with the statute
2. Compliance with Accounting Standards
3. More appropriate presentation of financial statements

Change in depreciation method is treated as change in accounting policy.

The following procedure has to be followed when there is a change in depreciation

method:
 Aggregate the depreciation under the old method, from the beginning to the
period of change in depreciation method. (A)
 Calculate the depreciation in accordance with the new method from the
beginning (i.e. Date of asset coming into use) to the period of change in
depreciation method. (B)
  If the result (A-B) is surplus, the company has charged greater amount of
depreciation under old method, which has to be reduced now. So, the surplus
is credited to P&L A/C.
 If the result (A-B) is deficit, the company has charged lesser amount of
depreciation under old method, which has to be increased now. So, the
deficit is charged to P&L A/C.
 In other words retrospective effect has to be given to change in
depreciation method.

Treatment in case of

Change in Historical cost Change in Estimated useful life

Due to
O/S depreciable amount of asset
Exchange variation Revaluation should be allocated over the
revised useful life of an asset

1. Increase or decrease, Depreciation on revalued

added/deducted from the amount
O/S WDV.
2. Depreciation on Revised
WDV provided
prospectively

Depreciation In case of addition or Extension to an Existing Asset:

Addition or Extension to an Existing Asset

Retains a separate identity and it is Becomes integral part of the

capable of being used even if existing asset.
existing asset is disposed off.

Depreciated at the rate of existing

Depreciated independently based on asset.
the useful life of additions or
extensions
Problems on AS – 6:
1. A machinery costing 10 lakhs has useful life of 5 years. After the end of 5
years, its scrap value would be 1 lakh. How much depreciation is to be charged in
the books of the company as per AS-6.
2. An asset was purchased for 100000 on 1.1.06; straight-line depreciation of
20000 per annum was charged (five-year life, no residual value). A general review of
asset lives is undertaken and for this particular asset, the remaining useful life as
at 31.12.08 is eight years.
The accounts for the year ended 31.12.08 are being prepared. What should the
annual depreciation charge be for 2008 and subsequent years?

3. Susmitha Ltd has an asset purchased 3 years ago for 9,70,000. The residual
value of the asset was estimated to be 10,000 after an estimated useful life of 8
years. The company charges straight line method of depreciation. Due to change in
technology, the company estimates that the asset will become obsolete in another 3
years time from now. How should depreciation be treated in view of revision in
useful life?

4. Chandrika Ltd has an equipment purchased 2 years ago for 3,80,000. The
residual value of asset was estimated to be 20,000. The total useful life of the
asset when purchased was 12 years. The company charges SLM. Due to price
adjustment, the cost of asset is now increased by 30,000. What is the treatment
for increase in the historical cost? Advise.

5. P ltd. purchased a machinery for 15,34,500 on 1st April of a financial year. The
company spent 35,500 towards cost of consultancy in relation with installation of
asset. Commissioning expenses came to 41,000. The useful life of the asset was
considered to be 10 years, at the end of which the scrap value is estimated to be
1,11,000. Two years later the company has made a significant addition to this
machinery for 1,96,000 in respect of which the estimated life is 10 years. The
company adopts SLM for depreciation. Explain the alternative treatments for the
addition of 1,96,000.

6. BB ltd. depreciated its plant and machinery under two different methods as
under:
Year 1 2 3 4 5
SLM 7.8 7.8 7.8 7.8 7.8
WDV 21.38 15.8 11.68 8.64 6.38
What would be the amount of resultant surplus/deficiency, if the company decides
to switch over from WDV method to SLM for first four years? Also state how you
will treat the same in accounts?