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Depreciation
Meaning :- Fall in the value and utility of such assets due to their constant use and expiry of time . Definition :- Depreciation may be defined as the permanent and continuing diminution in the quality, quantity or the value of an asset. William Pickles
Features of depreciation
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Depreciation is decline in the value of fixed asset (except land). Such fall is of permanent in nature . Once the value of an asset is reduced as depreciation, it cannot be restored. It is gradual and continuing process. It decreases only the book value of the asset, not the market value. It is used only in the respect of tangible fixed assets. Not used in case of wasting assets. It is a non cash expenses. Not lead to cash outflow..
Causes of depreciation
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By By By By By By By
constant use. expiry of time. expiry of legal rights. obsolescence. accident. depletion. permanent fall in market price..
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Fixed Instalment Method. Diminishing Balance Method. Annuity Method. Depreciation Fund Method. Insurance Method. Revaluation Method. Depletion Method. Machine Hour Rate Method..
For example :-original cost of the asset is 5,00,000. and scrap value is 1,00,000. after estimated life of 10 yrs.
Yearly Depreciation :-
5,00,000 1,00,000 10
= 40,000
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Difficulty in computation. Unequal charge against income. Undue pressure in later years. Unrealistic to write off the value of asset to zero. Difficulty in determination of scrap value..
For example :-If a machine is purchased for Rs 10,000 and depreciation is to be charged at rate of 10 %.
1st year on Rs. 10,000 @ 10% 2nd year on Rs. 9000 (10,000 -1000 ) = 9000 X10
= 1000 = 900
100
3rd year on Rs. 8100 ( 9000 -900 ) = 7290 X 10 100 = 810
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Easy calculation. Equal charge against income. No undue pressure in later years. Balance of asset is never written off to zero. Approved method by Income Tax Authorities..
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Asset cannot be completely written off Omission of Interest factor Difficulty in determining the rate of depreciation
Fixed Instalment Equal dep. is charged every year Book value of asset reduced to zero Combined burden on account of depr. and repairs is lighter in earlier years and heavier in later years This method is not approved by Income tax authorities.
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Diminishing Balance Method Dep. goes on decreasing every year Book value of asset cannot be zero Combined burden on account of depr. and repair will be almost equal over different years
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