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S.Y.J.C.
ACCOUNTS
DEPRECIATION
What? (Meaning)
Depreciation is a gradual and permanent reduction in the value of fixed assets due
to use and passage of time. It is an expense/loss to the business.
When?
Depreciation is calculated and accounted for at the end of each accounting year.
Since all accounting years end compulsory on 31st March, we can
say that generally depreciation is also provided on 31st March.
On which assets?
Depreciation is calculated and accounted only in respect of fixed assets like land
and building, machinery, vehicles etc. No depreciation is calculated or accounted in
respect of current assets like stock, debtors, etc.
Why?(Reasons)
Depreciation is calculated and provided at the end of each year for the following
reasons:
To know the correct value of the of the asset,
To know the correct profit or loss and
To provide for replacement of asset.
If depreciation is not provided than the asset and profit both will
be overstated.
How?(Methods)
Original Cost Method
Written Down Value Method.
Original Cost Method.
Under this method depreciation is provided every year at a fixed percentage on
the original cost of the asset.
Original Cost refers to the price at which the asset is purchased plus all
incidental expenses.
Incidental expenses are expenses incurred at the time of purchase of asset to
put it into usable condition. E.g. transport charges, installation charges,
registration charges. These expenses are to be added to the cost of the asset.
Under this method the percentage and the amount of depreciation both remain
constant every year.
Under this method after providing depreciation for some years the value of the
asset becomes exactly zero.
If the percentage of depreciation is not given the amount of depreciation can
be calculated by the following formula:
Dep. Per year = Original Cost – Estimated Scrap Value
Estimated life of the asset (in years)
Scrap value refers to the price which the asset can fetch at the end of its
useful life.
This method is also known as
Fixed Installment Method
Straight Line Method
Journal Entries
Particulars Rs. Rs.
1. For Purchase of asset
Asset a/c. Dr
To Cash/Bank a/c.
2. For Incidental Expenses
Asset a/c. Dr
To Cash/Bank a/c.
3. For Depreciation
Depreciation a/c. Dr
To Asset a/c.
4. For Sale of an asset
For depreciation till the date of sale
Depreciation a/c. Dr
To Asset a/c.
For Cash received
Cash/Bank a/c. Dr
To Asset a/c.
For Profit/Loss an sale
o If Profit
Asset a/c. Dr
To P/L a/c.
o If Loss
P/L a/c. Dr
To Asset a/c.
5. For Depreciation transferred to P/L a/c.
Depreciation a/c. Dr
To P/L a/c.