DEPRECIATION

 DEPRECIATION

 Important Features:

 Depreciation is charged on Fixed Asset (Tangible as well as Intangible).

 Depreciation is non cash expenditure and does not affect the cash flow statement.

 Value of such fixed assets decreases over a period of time due to usage, normal wear and

     tear, passage of time, obsolescence of technology and market changes.

 Depreciation of a fixed asset starts from the date when it is put to use.

 Schedule II of the Companies Act, 2013 prescribes the rate of depreciation for companies.

 Depreciation is not chargeable on Land as the useful life of land is unlimited.

 Amortization means writing off intangible Assets.

 Obsolescence means decline in the value of Fixed Asset due to Innovations and Inventions

which is an external factor.

Straight Line Method: Cost of Asset – Scrap Value Useful Life

Reducing Balance Method: A fixed percentage is charged to the written down value of asset each year so as to reduce the value of asset to its break-up value at the end of its life. Annual charge of depreciation decreases from year to year and Annual charge of repairs increases from year to year and hence a proper amount is charged to Profit each year for the use of fixed asset. (Widely Used in Income Tax)

Sum of year of Digit Method:

Depreciation =(Original Cost – Scrap Value) * Number of years of remaining life of asset Total of all digits of the life of the Asset

Total of all digits of the life of asset = n(n+1) 2

 Production Units Method:

Depreciation = Depreciable Amount * Production during the period/ Estimated total production

Annuity Method:

This method of depreciation takes into account the element of interest on capital outlay on fixed asset and seeks to write off the value of asset as well as the interest lost over the life of the asset. It assumes that amount paid out in acquiring asset, if invested elsewhere, would have earned interest which is considered as a cost of asset.

Machine Hour Method:

Where it is practicable to keep a record of the actual running hours of each machine, depreciation may be calculated on the basis of hours that the concerned machine worked. The machine hour rate of the depreciation is calculated after estimating the total number of hours that machine would work during its whole life.

 Sinking Fund Method:

The amount of depreciation set out annually may be available in cash or may be not able to realize in cash at the time of replacement of asset, so to avoid this situation, the amount of depreciation set out annually can be invested annually in government securities and interest earned on such government securities will be reinvested and the amount thereof shall be credited to sinking fund account.