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D epriciation. Depriciation is a gradual and permanent decrease in the value of assets from any cause. ( R.N.Carter ) Depriciation may be defined as permanent and continuing diminution in quality ,quantity or the value of assets. ( william pickles).

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d epriciation
Depriciation
  • Depriciation is a gradual and permanent decrease in the value of assets from any cause. (R.N.Carter)
  • Depriciation may be defined as permanent and continuing diminution in quality ,quantity or the value of assets. (william pickles)
chracterstics of depriciation
CHRACTERSTICS OF DEPRICIATION
  • Decrease in the value of assests
  • Gradual decrease
  • Process of allocation not of valuation
  • Permanent decrease in the value of assets
causes of depriciation
Causes of depriciation
  • Constant use
  • Effect of time
  • On expiry of legal rights
  • Accident
  • Human mistake
  • Obsolescence
  • Fall in price
  • Depletion
need objectives or significance of providing depriciation
Need ,objectives or significance of providing depriciation
  • To ascertain true profit and loss
  • Ascertainment of correct cost of production
  • Presentation of correct economic position
  • Arrangement of funds for the re-establishment of assests
  • To prevent the distribution of profits out of capital
  • To save the income tax
use of depreciation in other related terms
Use of depreciation in other related terms
  • Depreciation- used for physical assets
  • Amortization- used for intangible assets
  • Depletion- used for natural resources
  • Dilapidation- used in contract of lease
factors determining the amount of depreciation
Factors determining the amount of depreciation
  • Cost of assets
  • Estimated useful life of assets
  • estimated scrap value of assets
methods for recording depreciation
Methods for recording depreciation
  • 1. provision for depreciation account is to be maintained .
  • 2. provision for depreciation account is not to be maintained..
methods for providing depreciation
Methods for providing depreciation
  • Fixed installment method
  • Diminishing installment method
  • Annuity method
  • Depreciation fund method
  • Insurance policy method
  • Revaluation method
  • Depletion method
fixed instalment method
Fixed instalment method
  • A certain and equal amount is deducted

annually as depriciation.

  • Easy method.
  • Suitable for all type of business.
  • Value of asset become zero at the end of working life of asset.
  • Depriciation is shown as a direct deduction from the value of asset in balance sheet.
demerit of fixed instalment
Demerit of fixed instalment
  • Equal depriciation is charged every year but the efficiency of asset decreases with the passage of time.
  • No provision for interest on investment on asset.
  • No provision for replacement.
  • Difficult to estimate residual value.
  • Only considers the time duration,not on actual use of asset.
application of fixed installment method
Application of fixed installment method
  • Applicable for those assets on which repair and renewal expenses are very less.
  • Applicable on those org. where some assets have more repair expenses and some have less expenses.
calculation of depriciation
Calculation of depriciation
  • On the basis of working life of assets=
  • Depriciation=cost of assets-scrap value/
  • estimated SSWlife of asset
  • On the basis of % =

Depriciation = cost of asset * rate/100

diminishing balance method
Diminishing balance method
  • Depriciation is calculated on the opening balance of asset every year.
  • Easy calculation of depriciation.
  • In initial year dep. Is more and repair charges are less and in later year deprication is less and repair is more.so equal effect on profit and loss account.
  • Value of asset never become zero.
  • Method is permissible under income tax act 1961.
demerit of diminishing balance method
demerit of diminishing balance method
  • Detrmination of suitable rate is tough.
  • Value of asset can not be reduced to zero.
  • No provision for replacement.
  • No provision for interest.
  • Dep. Is more in initial year and less in later years.
  • If less rate is decided then more years are required for amortization of asset but asset ended earlier.
application of method
Application of method
  • Applicable on those assets which have more working life like
  • building
  • plant
  • machinery
difference in fixed and diminishing method
Difference in fixed and diminishing method

Fixed instalment

Diminishing method

  • Amount of dep. Remains equal.
  • Calculated on initial book value.
  • Book value can be reduced to zero.
  • Rate of dep is kept lower.
  • Effect of dep and repair is not equal on p&l a/c.
  • This method is not approved by income tax authority.
  • Amount of dep. Reduces every year.
  • Calculated on written down value.
  • Bookvalue never become zero.
  • Rate of dep is kept higher as compared to fixed instalment method.
  • Effect of dep and repair on p&l a/c is equal.
  • Approved by income tax authority