DEPRECIATION ACCOUNTING

DEPRECIATION ACCOUNTING

The accounting concept of depreciation refers to the process of allocating the initial / restated input valuation of fixed assets to several periods expected to benefit from their acquisition and use.

Depreciating accounting
Is a system of accounting which aims to distribute the cost or other basic value of tangible capital assets less salvage, over the estimated useful life of the unit in a systematic and rational manner.

DEPRECIATION
Depreciation may be defined as the permanent and continuous diminution in the quality, quantity or value of an asset.

Causes of Depreciation
Physical deterioration Economic factors Arises due to - Obsolescence - Inadequacy termination of the use of the asset due to growth and changes in the size of the firm Time factors Applicable in case of Lease, patents and copy rights Provision for the above is ammortisation Depletion natural resources - mines, quarries, oil wells

Amotization: Depreciation of intangible assets such as patents, copyrights, trade marks & goodwill. As intangible assts too have limited life, their cost must be written off over their life time.

Depletion refers to fall in the value of tangible wasting assets like iron ore, oil reserves According to ICAI, depreciation is a wider term and includes amortisation and depletion

Objectives of / Need for providing depreciation

Ascertainment of true cost of production Ascertainment of true & correct profits / losses Presentation of true and fair financial position To make provision for replacement of assets

Methods of depreciation
Fixed instalment Diminishing balance Sums of the digits method

Methods of depreciation
Annuity method Depreciation fund method Insurance policy method Revaluation method Depletion method Machine hour rate method

INVENTORY VALUATION
Inventory Stock kept by a company to meet its future requirements of production and sales

Held for sale in the ordinary course of business In the process of production for such sale In the form of materials or supplies to be consumed in the production process or in the rendering of servivces

Types of inventories
1. Raw materials 2. Goods in process / Semi finished goods 3. Finished goods

Methods of ascertaining inventories

Periodic Inventory method Value of stock is determined by physical counting of the stock on the accounting date annual stock taking Perpetual Inventory method A system of records maintained by the controlling department, which reflects the physical movements of stocks and their current balance.

Valuation of inventory at lower of cost or market price.

Inventory is valued at cost or market price whichever is lower

Methods of valuation of Inventory

FIFO First in first out LIFO Last in first out HIFO Highest in first out Base stock method Inflated price method provides for normal loss. Stock is valued at a price higher than the actual cost Specific identification method. valued at their purchase price Average cot Market price replacement / realisable price