Depreciation

Accounting standard -6

Accounting standard -6
AS-6 deals with Depreciation accounting and is applicable
to all depreciable assets.
The standard is applicable to all corporates and non
corporates since 1995
The standard is connected with AS-10,

Accounting standard-6 is not

applicable to
(i) Forests, plantations and similar regenerative natural
resources;
(ii) wasting assets
including expenditure on the exploration for and extraction of
minerals, oils, natural gas and similar non-regenerative resources;
(iii) expenditure on research and development;
(iv) goodwill and other intangible assets;
(v) live stock.

What is depreciation?
Depreciation

is a measure of the wearing out,

consumption or other loss of value of a depreciable asset
arising from use, effluxion of time or obsolescence
through technology and market changes.
Depreciation is allocated so as to charge a fair proportion
of the depreciable amount in each accounting period
during the expected useful life of the asset.

Objectives of depreciation
To ascertain profits correctly: the fall in the book value of
assets to be considered as use cost which should be
matched against revenue
To show the correct financial position: If depreciation is
not provided, assets will appear in the balance sheet at an
over stated figure
To save tax: depreciation is a provision and not actual
cash outflow. But depreciation is permitted to be deducted
from profits for tax purpose.

What is a depreciable asset

Depreciable assets are assets which
(i) are expected to be used during more than one accounting
period; and
(ii) have a limited useful life; and
(iii) are held by an enterprise for use in the production or
supply of goods and services, for rental to others and not for
the purpose of sale in the ordinary course of business.

What is Useful life

Useful life is the period over which a depreciable asset is

expected to be used by the enterprise.

Useful life of the asset is based on the expected wear and tear of
the asset
Obsolescence (due to technological changes, improvement in
production methods, changes in market demand)
Legal or other limits on the useful life of the asset
Useful life of a depreciable asset is shorter than the physical asset

What is depreciable amount

Depreciable amount of a depreciable asset is its historical
cost, or other amount substituted for historical cost in the
financial statements, less the estimated residual value

Amount of depreciation
The quantum of depreciation to be provided in accounting
period involves the exercise of management in the light of
technical, commercial, accounting and legal requirements.

Methods of depreciation- Straight

line method
There are several methods of depreciation
The most commonly employed in industrial and commercial enterprises are the straight line and
reducing balance method
a. Straight line method: An equal amount is written off every year during the working life of an
asset so as to reduce the cost of the asset to NIL or its residual value at the end of its useful life.
Straight line method =
Amount

Historical
cost or other
amount
substituted
for HC

Residual
value

Deprecia
ble
amount

The management of an enterprise decides the most appropriate method

Useful
life

of
deprecia
tion

Historical cost
Historical cost includes any money outlay equivalent to
1. Acquisition
2. Installation
3. Additions
4. Improvement
In other words, it is the cost at which asset is recognized

Written down value method

A fixed percentage of the diminishing value of the asset is
written off each year so as to reduce the asset to its salvage
value at the end of its life
Residual
Depreciationrate=1n
value
/cost

Change in method of
depreciation
A change from one method of providing depreciation to another should be made only if the adoption
of the new method is required by statute or for compliance with an accounting standard or if it is
considered that the change would result in a more appropriate preparation or presentation of the
financial statements of the enterprise.
When such a change in the method of depreciation is made, depreciation should be recalculated in
accordance with the new method from the date of the asset coming into use.
The deficiency or surplus arising from retrospective recomputation of depreciation in accordance
with the new method should be adjusted in the accounts in the year in which the method of
depreciation is changed.
In case the change in the method results in deficiency in depreciation in respect of past years, the
deficiency should be charged in the statement of profit and loss.
In case the change in the method results in surplus, the surplus should be credited to the statement
of profit and loss. Such a change should be treated as a change in accounting policy and its effect
should be quantified and disclosed

Disclosure
The following information should be disclosed in the
financial statements:
(i) the historical cost or other amount substituted for
historical cost of each class of depreciable assets;
(ii) total depreciation for the period for each class of assets;
and
(iii) the related accumulated depreciation

 The following information should also be disclosed in the

financial statements along with the disclosure of other
accounting policies: AS 6
(i) depreciation methods used; and
(ii) depreciation rates or the useful lives of the assets, if
they are different from the principal rates specified in the
statute governing the enterprise.

Example- Buildings of a company

(Rs in lakhs)
buildin
g
additio
n
Gross
block
dep upto 2015
charge during the year

total
net
block

158418.82
3605.91

162024.73
35995.83
5114.36

41110.19
120914.54

S No.

Rates of depreciation as per

income tax act
Asset Class

1.

Building

2.

Building

3.

Building

4.

Furniture

5.

Plant &
Machinery

6.

Plant &
Machinery

7.

Plant &
Machinery

Asset Type

Residential buildings except hotels and

boarding houses
Hotels and boarding houses
Purely temporary erections such as wooden
structures
Furniture Any furniture / fittings including
electrical fittings and air conditioners
Motor car, motor cycle,bike, scooter other
than those used in a business of running them
on hire, Mobile phone
Motor buses/taxies/lorries used in a business
of running them on hire
Computers, Laptops, computer software,
Printer, Scanner, UPS and other peripheral
devices

Rate of
Depreciation
5%
10%
100%
10%
15%
30%
60%

Useful life of few Tangible Assets in

Schedule II of the Companies Act 2013
Asset

Useful life (in years)

Buildings other than RCC structure

30 years

pipelines

30

General furniture and fittings

22

Motor cycles

10

Office equipment

Servers and networks

Desktops and laptops