CONCEPT OF DEPRICIATION

CONCEPT OF DEPRICIATION 

                          Thanks To MBA DEVINDAR SIR

Meaning of depreciation

Depreciation is the reduction in the value of tangible fixed assets such as building, plant, machinery and furniture etc.

Meaning of Amortisation:

Amortisation is gradual writing off of intangible assets over it's useful life Span.

Ex. Patents,  purchased goodwill, copyright etc.

Meaning of Depletion

 

Depletion is the value of asset extracted from quarry, mines etc.

Ex. Extraction of coal from coal mines is the depletion of coal stock.

Depreciation is expense or loss and it is transferred to the debit side of profit and loss account.

Key points about depriciation

1) Depreciation is depriciation non cash item.

2)  it is charged on all fixed assets except freehold land because land has infinite life.

Cause of depreciation of fixed assets

1) sudden loss due to accidents

2) obsolescence due to new model or better quality

3) Efflux of time

4) wear and tear due to use of assets

Objective/ needs:-

1) To determine correct profit or loss

2) to show true financial position

3) to determine correct cost of production

4)  To provide funds for replacement

Methods of depreciation 

1) straight line method (SLM)

I)In SLM depreciation is calculated at a fixed percentage on the original cost .

II) In SLM depreciation remains uniform from year to year.

Rate of depreciation

                                        Amount of dep.

                                    =   ____________________ x 100

                                           Total cost of Asset

                   And

         Total Cost of assets - scrap value

         = ___________________________

                      Life of Asset

Diminishing value method

2) Return Down value method (RDVM)

I) in RDVM depreciation is reduced every year

II) int RDVM  depreciation is calculated on original cost in the first year and written down value in subsequent year.

Facts about depreciation

1) depreciation arises because of wear and tear.

2) loss on sale of an asset is debited to profit and loss account.

3) under reducing ( Diminishing) balance method amount of depreciation changes every year.

4) balance of didual (scrap value)