Meaning of Depreciation

The gradual or permanent decrease in the value of an asset The permanent and continuing diminution in the quality, quantity or value of an asset It covers Depletion, Amortization & Obsolescence

Causes of Depreciation
Physical wear and tear With passage of time Changes in economic environment Expiration of legal rights

Objectives of Providing Depreciation

To ascertain true income To show true financial position To retain, out of profits, funds for replacement To ascertain the proper cost of the product To compute tax liability of owner To meet legal requirements To allocate the cost of fixed assets

Methods of allocating depreciation

I) II) Straight Line Method (SLM) Written Down Value Method (WDV) Machine Hour Rate Method Sum-of-the-years digits Method Depletion Method Change of Methods Prospective Retrospective

Straight Line Method

Also known as fixed or equal instalment method A fixed & equal amount of depreciation is written off during each accounting period over the expected useful life of the asset. Annual Depreciation = Original Cost Estimated Salvage Value Estimated Useful Life in Years Amount of depreciation remains constant year after year

Written Down Value Method

Also known as Reducing Balance Method A fixed percentage calculated upon the original cost (in the first year) and written down value (in subsequent years) of an asset, is written off during each accounting period over the expected useful life of the asset Rate of depreciation remains constant year after year whereas amount of depreciation goes on decreasing.

Depletion Method
Suitable for depreciating Mines, Quarries, Oil wells etc. Depreciation = Cost of assets- salvage* Out put of Accounting Period Estimated total output during the useful life of the asset

Sum of Years Digit t Method

The effect of this method is to write off approximately 2/3rd of the total cost of the asset in the first half of the assets estimated life Depreciation= Original cost-Scrape Value*Year of Depreciation Sum of estimated life of the asset

Machine Hour Rate Method

Under this method depreciation is calculated depending on the usage of the asset on hourly basis Depreciation= Cost of asset-Salvage*Working Hour of the Accounting Period Estimated total working hours during the estimated useful life of the asset Total 7 Question including all the methods