DEPRECIATION ACCOUNTING

INTRODUCTION: Depreciation means reduction in the value of fixed assets due its wear and tear. Depreciation is charged on fixed assets only and it is termed as loss to the business. Depreciation is also termed as provision for the replacement of asset at the end of its useful life. FEATURES OF DEPRECIATION :
1. It is charged on fixed asset only. 2. It is a gradual process.

3. It is a permanent decrease in the value of fixed asset. 4. It takes place continuously. 5. It is basically a fall in the value of depreciable fixed asset. METHODS OF CHARGING DEPRECIATION : (A)Fixed Installment Method - It is also known as Straight Line Method or Original Cost Method. Under this method every year durind the useful life of asset, depreciation is calculated as certain fixed percentage of original cost of asset. In this method annual installement of depreciation can also be calculated by the following formula >> Depreciation per annum= Cost of fixed asset scrap value of asset Estimated useful life

Practice Problems :
1. Arya Ltd. purchased machinery worth Rs. 7000 and spent Rs. 3000 for erection and

installation on 1st Jan 2003. On 1st July 2004 they purchased another machinery worth Rs.5000. Depreciation is to be charged at 10% p.a. on every 31st of Dec under Fixed Installment Method (FIM). Prepare Machinery A/C and Depreciation A/C from the year 2003 to 2005.

2. M/S Ajay traders purchased furniture costing Rs. 30000 on 1/7/00. They purchased

additional furniture of Rs.15000 on 1/4/01. It was decided to depreciate it @10% p.a. on 31st March every year under straight line method. Furniture on 1/7/00 was sold for Rs.25000 on 31/3/02. Prepare furniture account for the year ended 31st March 2001, 2002.

3. Dolphin Ltd. purchased machinery worth Rs. 700000 and spent Rs.50000 for erection

and installation on 1st Jan 2004. On 1st July 2005 they purchased another machine worth Rs.500000. Depreciation is to be charged at 12%p.a. on every 31st Dec under Fixed Installment Method. Prepare Machinery A/C , Provision for Depreciation and Depreciation A/C from the year 2004 to 2006.

4. Almondz Ltd. purchased machinery worth Rs.75000 and spent Rs.25000 for erection and

installation on 1st Jan 2004. On 1st July 2005 they purchased another machine worth Rs.50000. Depreciation is to be charged at 10% p.a. on every 31st of Dec under (FIM). Prepare Machinery A/C and Depreciation A/C from the year 2004 to 2006.

5. Brief Ltd. purchased machinery worth Rs. 125000 and spent Rs.25000 for erection and

installation on 1st July 2002. On 1st July 2003 they purchased another machine worth Rs.50000. Depreciation is to be charged at 10%p.a. on every 31st Dec under Fixed Installment Method. On 30th June 2005 the machinery purchased on 1st July 2002 is disposed off for Rs. 100000.Prepare Machinery A/C for the year ended 30th June2003, 2004 and 2005.

6. M/S Ekta Pharmaceuticals imported a machine on 1st Oct 2006 for Rs.160000, paid

customs duty and freight Rs.80000 and incurred erection charges rs.60000. Another local machinery costing Rs. 100000 was purchased on April,2007, On 1st Oct 2008, a portion of the imported machinery (value one third) got out of order and was sold for Rs. 34800.Another machinery was purchased to replace the same for Rs. 50000. Depreciation is to be calculated at 20% p.a. using SLM. Show Machinery A/C for the years 2006-07, 2007-08 and 2008-09.

(B)Reducing Balance Method It is also known as Diminishing Balance Method or Written Down Value Method. Under this method depreciation is charged at a certain percentage on original cost in the first year and subsequently on opening written down value of an asset every year. Due to this an amount of depreciation changes every year and it goes on reducing. Practice Problems :
1. Brahma Ltd. purchased machinery worth Rs.7500 and spent Rs.25000 for installation

on 1st Jan 2005. On 1st July 2007 they purchased another machine worth Rs50000. Depreciation is to be charged at 10%p.a. on every 31st of Dec under Reducing Balance Method. Prepare Machinery A/c and Depreciation A/C from the year 2005 to 2007.

2. China Enterprise purchased equipments costing rs.300000 on 1st July 2000. They

purchased additional equipment of Rs.150000 on 1st April 2001. It was decided to depreciate it @15% on 31st March every year under Reducing Balance Method. Equipments purchased on 1st July 2000 were sold for Rs. 160000 on 31/3/02. Prepare Equipment A/C and Depreciation A/C for the year ended 31st March 2001, 2002.

3. Marshall Ltd. purchased machinery worth Rs. 325000 and spent rs.25000 for

installation on 1st Jan 2005. On 1st October 2006 they purchased another machine worth Rs.175000. Depreciation is to be charged at 8% p.a. on every 31st of Dec under (RBM). Prepare Machinery A/c, Provision for Depreciation and Depreciation A/C from the year 2005 to 2007.

4. Altaf Trading Co. purchased furniture of Rs.55000 on 1st April 2001 and started

depreciating it @5%p.a. on RBM on every 31st March. On 1st July 2002 it purchased additional furniture for Rs.15000. Prepare Furniture A/C for 3years from the beginning.

5. Bold Trading Co. purchased 5 Computers of Rs.55000 on 1st Jan 2001 and started

depreciating it @20%p.a. on RBM on every 31st Dec. On 1st July 2002 it purchased additional computer for Rs.45000. Two computers purchased on 1st Jan 2001 were sold for Rs.50000 on 31st Dec 2003.Prepare Computer A/C for 3years from the beginning.

6. A company whose accounting year ends on 31st March, purchased on July 2006

machinery costing Rs. 30000. It further purchased machinery on 1st Jan 2007 costing Rs. 2000 and on 1st Oct 2007 costing Rs. 10000. On 1st April 2008, one third the machinery which was installed on 1st July 2006 became obsolete and was sold for Rs. 3000. Show Machinery A/C charging depreciation @10%p.a. on WDV.

Journal Entries for Depreciation : No. 1. Transactions Purchase of fixed asset for cash Fixed asset A/C Cash/Bank A/C Fixed asset A/C Partys A/C Journal Entry Dr To

2.

Purchase of fixed asset on credit

Dr

To

3.

Payment of incidental charges like installation Fixed asset A/C or erection charges, etc Cash A/C

Dr

To

4.

Charging depreciation on asset

Depreciation A/C Fixed Asset A/C

Dr

To

5.

Transferring depreciation to profit and loss account

Profit and Loss A/C Depreciation A/C

Dr

To

6.

Sale of fixed asset (at WDV)

Cash A/c Fixed Asset A/C

Dr

To

7.

Sale of fixed asset (at Profit)

Cash A/c Fixed Asset A/C and Loss A/C (Profit)

Dr To To Profit

8.

Sale of fixed asset (at Loss)

Cash A/c Fixed Asset A/C and Loss A/C (Loss)

Dr To To Profit

Proforma of Fixed Asset Account : Fixed Asset A/C Date Particulars To Balance b/d To Cash/Bank To P & L(profit on sale or change of method) J/F Amt xx xx xx Date Particulars By Depreciation By Cash/Bank (Sale of Asset) By P & L (loss on sale or change of method) By Balance c/d J/F Amt xx xx

xx xx

xx

xx

To Balance b/d Proforma of Depreciation Account:

xxx

xxx

Depreciation A/C Date Year1 Particulars To Fixed Asset J/F Amt xx xx Year2 To Fixed Asset xx xx Year3 To Fixed Asset xx xx Year3 By P & L Year2 By P & L Date Year1 Particulars By P & L J/F Amt xx xx xx xx xx xx