Table of Content Objective Definition Treatment Method Live Example Industry Practice
OBJECTIVE Primary To ascertain true profit of the business To show proper value of asset Statutory need of business Secondary Allows businesses to analyze asset cost to revenue Produce budgets that remain consistent, following major expenses
Definition Every Tangible Asset has a useful life So, in book, Asset Value cannot be same throughout it’s life time The amount by which asset value decreases in the period is known as “Depreciation” i.e Depreciation is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, effusion of time or obsolescence through technology and market changes OR Depreciation is a systematic and rational process of distributing the cost of tangible assets over the life of assets
Treatment This Standard deals with depreciation accounting and applies to all depreciable assets. An asset is called as Depreciable asset when– It is expected to be used for more than one accounting period to spread the initial price of the asset over its useful life Are used in production or supply of goods and services, for rental to others or for administrative purpose E.g. : P&M, building, Computer, Vehicles, furniture, etc. Contd...
Treatment Exception’s Forests, plantations and similar regenerative natural resources Wasting assets including expenditure on the exploration for an extraction of Minerals Oils, Natural gas and similar non-regenerative resources. Expenditure on Research and Development Goodwill and Other Intangible Assets Copyright, Patents etc.. Live Stock with exceptions This standard also does not apply to land unless it has a limited useful life for an enterprise.
Methods of Depreciation 1.Straight Line method 2.Written down Value 3.Depletion Method 4. Machine Hour rate Method 5. Depreciation Fund Method 6. Insurance Policy Method 7. Annuity Method 8. Replacement Method
Example A company buys equipment for Rs. 10,000. It decides to depreciate the asset at cost of 20%. We will now see how the value looks after 5 years in the below table with both WDV and SLM method. YearCostDepreciation @ 20% WDV = Cost – Depreciation Accumulated depreciation 1 st year10,000200080002000 2 nd year8000160064003600 3 rd year6400128051204880 4 th year5120102440965904 5 th year409681932766723 YearCostDepreciation @ 20% Accumulated Depreciation SLM = Cost – Accumulated Depreciation 1 st year10,0002000 8000 2 nd year10000200040006000 3 rd year10000200060004000 4 th year10000200080002000 5 th year100002000100000
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