Depreciation

Accounting
Group 8
MP15002 : Abhimanyu Singh
MP15021 : Kush Kumar
MP15030: Raghav Ajmani
MP15039 : Saurabh Sinha
What is Depreciation
• Depreciation is terms as the ‘allocation of the depreciable amount
of an asset over its estimated life.’
• According to the matching concept, revenues should be matched
with expenses in order to determine the accounting profit.
• Hence the cost of the asset purchased should be spread over the
periods in which the asset will benefit a company.
Objective
• To calculate proper profits.
• To show the asset at its reasonable value
• To maintain the original monetary investment of the asset intact.
• Provision of depreciation results in some incidental advantages also.
• To provide for replacement of an asset.
• Depreciation is permitted to be deducted from profits for tax
purposes.
Factors in Computing Depreciation Expense

-Initial cost of the Asset

-Expected useful life

-Estimated value at the end of its useful

life
Depreciation Methods: Straight Line

• Provides for the same amount of depreciation expense for each year of
the asset’s useful life

𝑪𝒐𝒔𝒕𝒐𝒇 𝑨𝒔𝒔𝒔𝒆𝒕 − 𝑹𝒆𝒔𝒊𝒅𝒖𝒂𝒍 𝑽𝒂𝒍𝒖𝒆

𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑬𝒙𝒑𝒆𝒏𝒔𝒆 =
𝑼𝒔𝒆𝒇𝒖𝒍 𝑳𝒊𝒇𝒆 𝒐𝒇 𝑨𝒔𝒔𝒆𝒕
Depreciation Methods:
Written Down Value/Declining Balance
• Under this method depreciation is charged at a fixed rate on the
reducing balance every year.

𝒖𝒔𝒆𝒇𝒖𝒍 𝒍𝒊𝒇𝒆 𝑹𝒆𝒔𝒊𝒅𝒖𝒂𝒍 𝑽𝒂𝒍𝒖𝒆

𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 = 𝟏 −
𝑪𝒐𝒔𝒕 𝒐𝒇 𝒂𝒔𝒔𝒆𝒕
 Depreciation Methods: Sum of Digits

•This method is used where the amount of

depreciation goes on decreasing in the coming
years

𝒔𝒖𝒎 𝒐𝒇 𝒅𝒊𝒈𝒊𝒕𝒔 = n (n+1) /2 ; where n=useful economic life (in years)

𝐂𝐨𝐬𝐭 − 𝐑𝐞𝐬𝐢𝐝𝐮𝐚𝐥 𝑽𝒂𝒍𝒖𝒆 𝒙 𝒏
𝐘𝐞𝐚𝐫 𝟏: 𝐃𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧 =
𝒔𝒖𝒎 𝒐𝒇 𝒅𝒊𝒈𝒊𝒕𝒔

𝐂𝐨𝐬𝐭 − 𝐑𝐞𝐬𝐢𝐝𝐮𝐚𝐥 𝑽𝒂𝒍𝒖𝒆 𝒙 (𝒏 − 𝟏)

𝐘𝐞𝐚𝐫 𝟐: 𝐃𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧 =
𝒔𝒖𝒎 𝒐𝒇 𝒅𝒊𝒈𝒊𝒕𝒔
 Depreciation Methods: Units of Production

•An asset's useful life is expressed in the total units

that are expected to be produced or the asset's
total activity during its life. The asset's cost is then
allocated to the accounting periods based on the
asset's usage, units produced, activity, etc.

𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 =
𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 𝑿 𝑼𝒏𝒊𝒕𝒔 𝒐𝒇 𝒂𝒄𝒕𝒊𝒗𝒊𝒕𝒚 𝒅𝒖𝒓𝒊𝒏𝒈 𝒚𝒆𝒂𝒓
Problems
WRITTEN DOWN VALUE/DECLINING-BALANCE
WRITTEN DOWN VALUE/DECLINING-BALANCE
Straight Line Method
Straight Line Method
Sum of Digits Method/Sum of The Years’ Digits Method
Sum of Digits Method/Sum of The Years’ Digits Method
UNITS OF PRODUCTION
 Machinery Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
1-Jul-2003 To Bank 1,200,000 31-Mar-2004 By Depreciation 455,000
1-Jan-2004 To Bank 1,600,000 2,345,000
By balance c/d
2,800,000 2,800,000

1-Apr-2004 To Balance B/d 2,345,000 31-Mar-2005 By Depreciation 873,250

1-Jan-2005 To Bank 600,000 By balance c/d 2,071,750
2,945,000 2,945,000

1-Apr-2005 To Balance B/d 2,071,750 31-Mar-2006 By Depreciation 590,931

By Cash 120,000
By Profit & Loss Account 71,750
By balance c/d 1,289,069
2,071,750 2,071,750

1-Apr-2006 To Balance B/d 1,289,069 31-Mar-2007 By Depreciation 427,700

By balance c/d 861,369
1,289,069 1,289,069

1-Apr-2007 To Balance B/d 861,369 31-Mar-2008 By Depreciation 278,005

By balance c/d 583,364
861,369 861,369

1-Apr-2008 To Balance B/d 583,364 31-Mar-2009 By Depreciation 180,703

By balance c/d 402,661
583,364 583,364

1-Apr-2009 To Balance B/d 402,661 31-Mar-2010 By Depreciation 117,457

By balance c/d 285,203
402,661 402,661

1-Apr-2010 To Balance B/d 285,203 31-Mar-2011 By Depreciation 88,382

1-Oct-2010 To bank 200,000 By balance c/d 396,821
485,203 485,203

Date Particular JF Amount
31-Mar-2004 ToMachinery A/c
31-Mar-2005 ToMachinery A/c
31-Mar-2006 ToMachinery A/c
31-Mar-2007 ToMachinery A/c
31-Mar-2008 ToMachinery A/c
31-Mar-2009 ToMachinery A/c
31-Mar-2010 ToMachinery A/c
31-Mar-2011 ToMachinery A/c
Depreciation Account
Date Particular JF Amount
455,000 31-Mar-2004 By Profit & Loss A/c 455,000
873,250 31-Mar-2005 By Profit & Loss A/c 873,250
590,931 31-Mar-2006 By Profit & Loss A/c 590,931
427,700 31-Mar-2007 By Profit & Loss A/c 427,700
278,005 31-Mar-2008 By Profit & Loss A/c 278,005
180,703 31-Mar-2009 By Profit & Loss A/c 180,703
117,457 31-Mar-2010 By Profit & Loss A/c 117,457
88,382 31-Mar-2011 By Profit & Loss A/c 88,382