DEPRECIATION

DEPRECIATION

Depreciation is assessed to represent the true worth of assets on the balance sheet and to appropriately determine profit or loss.

Depreciation, then, is the continuous, ongoing, and irreversible loss of value resulting from normal wear and tear or any other comparable cause in a fixed asset. Assets can be depreciated in six different ways. As only a few instances, consider the following techniques: fixed installment, straight line, beginning cost, decreasing or reducing balance, written-down value, annuity, revaluation, depreciation, sinking fund, and insurance policy processes. However, this year we will be studying the first two methods.

(i) Fixed Instalment / Straight Line / Original Cost Method: Under this method, depreciation is charged at a fixed rate at the end of every year during the lifetime of an asset. The formula for depreciation :

Depreciation =  Original Cost of asset + Installation Charges – Break-up Value / Scrap Value

Estimated Life Of An Asset

(ii) Diminishing Balance / Reducing Balance/ Written Down Value Method : Under this method, depreciation is charged on the opening balance of the asset each year at a given rate.

An amount received when an asset is sold after its useful life is called Scrap Value / Residual Value / Break up Value.

Charges incurred for the erection of the machinery are called Installation Charges / Erection Charges.

ACCOUNTING TREATMENT
1. When any asset is purchased
                    Asset A/c. Dr.
                        To Cash / Bank A/c.

2. When depreciation is charged
                    Depreciation A/c. Dr.
                        To Asset A/c.

3. When depreciation is transferred to Profit & Loss A/c.
                    Profit & Loss A/c. Dr.
                        To Depreciation A/c.

4. When any is sold
                    Cash / Bank A/c. Dr.
                        To Asset A/c.

5. When there is loss on sale of any asset
                    Profit & Loss A/c. Dr.
                        To Asset A/c.

When there is profit on sale of asset vice-versa