Diminution in
Utility
Natural Wear &
Tear
Exhaustion of
the Subject
Matter/Accident
Efflux of Time
Obsolescence
Prepare for your exams
Study with the several resources on Docsity
Earn points to download
Earn points by helping other students or get them with a premium plan
Guidelines and tips
Prepare for your exams
Study with the several resources on Docsity
Earn points to download
Earn points by helping other students or get them with a premium plan
Community
Ask the community
Ask the community for help and clear up your study doubts
University Rankings
Discover the best universities in your country according to Docsity users
Free resources
Our save-the-student-ebooks!
Download our free guides on studying techniques, anxiety management strategies, and thesis advice from Docsity tutors
Economic depreciation implies that an asset loses its value over time. But accounting depreciation has more to do with cost allocation than with loss of value.
Typology: Study notes
2018/2019
1 / 27
This page cannot be seen from the preview
Don't miss anything!
Related documents
Partial preview of the text
Download Depreciation; Financial Management and more Study notes Finance in PDF only on Docsity!
Diminution in Utility
Natural Wear & Tear
Exhaustion of the Subject Matter/Accident
Efflux of Time
Obsolescence
Internal Depreciation
Natural Wear & Tear
External Depreciation
Exhaustion of the subject matter
Effluxion of time Accident
Obsolescence
Example
Machinery Purchased Rs.25,0000/- Used for^ Years:- 5^
Total Profit for the 5 years:- Rs.300000/-
As it is not Visible
Calculate Correct Profits
Present True & Fair view of the financial position
Accumulate funds for replacement of assets
Calculate Correct Cost of Production
Actual
Historical
Includes Installation & Commissioning
Solution
Machinery:-Rs.20,00,000/- + Installation:- Rs.1,00,000/- + Trial Run Expense:- Rs.90,000/-
Cost of Asset = Rs.21,90,000/-
Example
A Machinery Purchased for Rs.20,00,
Expenses paid for Trial Run:-Rs.90,000/- Installation Expense:- Rs.1,00,000/-
Estimated Difficult toCalculate
Ascertain Whether Amount is Significant or not
Cost of Asset
Residual Value
Depreciable Amount
Straight Line Method
Reducing Balance Method
Sum of Years of Digits Method
Annuity Method
Sinking Fund Method
Machine Hour Method
Production Unit Method
Methods of Depreciation
Formula
Rationale
Advantages
Disadvantages
Journal Entries
Ledger
Example
Straight Line Method :- Rationale
Equal Amount Written Off
Simplest Way
Assets give equal utility through out the life
Advantages
Simple to Apply
Accurate Results
Example
Mr. Ajay Malya purchased an aircraft for bingfisher on 01.04.2012 costing Rs.30,000/-. Asset has useful life of 10 years with Nil scrap Value. Accountant Mr. Raju wants to provide depreciation on SLM basis. Suggest him on amount of depreciation to be charged & Leger Posting.
Straight Line Depreciation:- Cost of Asset – Scrap Value Useful Life
30000 - 0 Rs.3,000/- 10
Reducing Balance Method
1 - n Net residual Value
Acquisition cost
- Where n = Useful life (In Years)
Most Commonly Used
Even prescribed by Income Tax Act