DEPRECIATION

Whatisdepreciation What is depreciation

Reduction In the value of an asset in an ReductionInthevalueofanassetinan accountingperiod
Expired cost Expiredcost Partofthetotalcostofthefixedasset Charged to the revenue of the firm Chargedtotherevenueofthefirm

CAUSES
Wear&Tear Wear & Tear Obsolescence Passageoftime f i Accidents Depletion

Objectivesofprovidingdepreciation Objectives of providing depreciation

Toascertaintrueprofits To ascertain true profits Toshowthetruefinancialposition Toprovideforreplacementofassets id f l f Tofollowlegalrequirements

SalientFeatures Salient Features

Permanentdecreaseinthevalueoffixedassets Gradualbutcontinuousprocess Calculatedonthebasisofsomeaccepted principlesofaccounting Ithasnorelationshipwiththemarketvalueof theasset the asset Itisnotanexactamount,butanestimate It is a charge against the revenue of the firm Itisachargeagainsttherevenueofthefirm, irrespectiveofwhetheritismakingprofitsornot. Itisanoncashexpense

DepreciationVsMaintenance Depreciation Vs Maintenance

Maintenance
Maintenanceexpenditureonamachineis necessary.Withoutpropermaintenance,a necessary Without proper maintenance a machinecannotfunctionproperly.

Depreciation
Depreciationistheexpiredcostofanasset.The totalcostofanassetiswrittenoffwithinthe total cost of an asset is written off within the periodofitseffectivelife.

AccountingforDepreciation Accounting for Depreciation

AssessmentofDepreciation O i i lC OriginalCost Usefullifeoftheasset Residualvalue/scrapvalue

Methodofdepreciation Method of depreciation

Straightlinemethod WrittenDownValuemethod

Straightlinemethod Straight line method

Fixed instalment method / Original cost Fixedinstalment method/Originalcost method Depreciation=
OriginalCost Estimatedscrapvalue Estimatedusefullifeoftheasset

Straightlinemethod(contd) Straight line method (contd)

Advantages
Simpletocomprehend Simpletocalculate Favoured by small business owners bysmallbusinessowners Suitableforassetswhereeffectivelifecanbeeasily estimated

Disadvantages
Generally,theassetisofmoreuseintheinitialperiodof itslife thismethoddoesnotaccountforthat Itignorestheworkingcapacity i h ki i Depreciationneedstobecalculatedseparatelyforeach itemofthefixedassets

WrittenDownValuemethod Written Down Value method

Depreciation is charged on the written down Depreciationischargedonthewrittendown valueeachyearandnot,ontheoriginalcost oftheasset of the asset Thus,depreciationchargedyearisnot constant,ratheritisreducingeveryyearas constant rather it is reducing every year as theWDVkeepsdecreasing

WDVmethod WDV method

Advantages g
Popularmethod Freshcalculationsarenotnecessaryforadditionstoasset Asdepreciationchargedreducesoveryears,totalexpense d h d d l foruseofasset(depreciation+repairs)tendstoremain constant(Since,repairsgenerallyincreaseovertime)

Disadvantages
Bookvalueoftheassetmaynotbecomenilattheend A Amountofdepreciationislowerinthelateryearswhen t fd i ti i l i th l t h theassetbecomesolder.Actually,anolderassettendsto depreciatefaster