Depreciation: Theory and Practice
Permanent decline in the value of fixed assets is called depreciation. all business organization should purchase various fixed assets like, building, machinery, furniture, etc. every year depreciation must be deduct from the value of fixed assets.
Causes of depreciation
- wear and tear
- depletion
- accidents
- fall in market price
- efflux of time
- change in technology
affecting factor for amount of depreciation
- cost of price of assets
- invoice price of fixed assets
- transportation cost
- installation or erection cost
- import duty
- estimated salvage value/scrap value of assets
- estimated working life/useful life of assets
- provision for income tax act/company act
methods of charging depn
- straight line method
- diminishing balance method
- depreciation fund method
- annuity method
- re-valuation method
straight line method:-
in this method depreciation should be charged equal amount every year from the purchase date of fixed assets till sod date depreciation amount should be written off equally. this methods also known as original cost method equal installment method, historical method etc
- find out the amount of depreciation
- when ./. of depreciation is given
annual depreciation = cost of assets x %
100
- if working life of assets is given
annual depreciation= cost of assets – salvage value
Working life
XYZ company
machinery account
| Date | Particulars | if | Amount | Date | Particulars | if | Amount |
| 1-1-2005 | To bank a/c
[3800 +2000] |
40000 | 31-12-2005 | By depn a/c | 7000 | ||
| By balance c/d | 33000 | ||||||
| 40000 | 40000 | ||||||
| 1-1-2006 | To balance b/d | 33000 | 3-12-2006 | By depn a/c | 7000 | ||
| By balance c/d | 26000 | ||||||
| 33000 | 33000 | ||||||
| 1-1-2007 | To balance b/d | 26000 | 31-12-2007 | By depn a/c | 7000 | ||
| By balance c/d | 19000 | ||||||
| 26000 | 26000 | ||||||
| 1-1-2008 | To balance b/d | 19000 | 31-12-2008 | By depn a/c | 7000 | ||
| By balance c/d | 12000 | ||||||
| 19000 | |||||||
| 1-1-2009 | To balance b/d | 1200
|
annual depreciation
cost-salvage value working life
40,000-5000 5
Rs,7000.
- cr.
| Date | Particular | If | Amount | Date | Particular | If | Amount |
| 1-1 | To, bank A/c | 22,000 | 31-12 | By, depn– A/c | 2,000 | ||
| 2006 | By, balance c/d | 20,000 | |||||
| 22,000 | 22,000 | ||||||
| 1-1-2007 | To, balance b/d | 20,000 | |||||
| 1-1-2007 | To, bank A/c | 7,500 | 31-12 | By, depn– A/c | 2,700 | ||
| 2007 | [2,000+700] | ||||||
| By, balance c/d | 24,800 | ||||||
| 27,500 | |||||||
| 1-1-2008 | To, balance b/d | 24,800 | 31-12 | By, depn– A/c | 27,000 | ||
| [200+700] | |||||||
| 24,000 | By, balance c/d | 22,100 | |||||
| 1-1 2009 | To, balance c/d | 22,100 | 31-12 | By, depn– A/c | |||
| To, bank A/c | 6,300 | 2009 | [2000+700+300] | 3,000 | |||
| By balance c/d | 25,400 | ||||||
| 28,400 | 28,400 | ||||||
| 1-1-2010 | To balance b/d | 25,400 | 31-12 | By, depn– A/c | 3,300 | ||
| 2010 | [2000+700+600] | ||||||
| By balance c/d | 22,100 | ||||||
| 25,000 | 25,400 | ||||||
| 1-1-2011 | To, balance b/d | 22,100 | |||||
annual depn-= cost – salvage vaue
Working life
= 22000-2000
10yrs
= 20000
10yrs
= 2000.
annual depn– -= cost – salvage vaue
Working life
=7500-500
10
=7000
10
= 700
annual depn-= salvage vaue
Working life
= 6300-300
10
= 6000
10
= 600
for 6 month
=600×6
12
=300
| Date | Particular | If | Amount | Date | Particular | If | Amount |
| 1-1-2065 | To, bank A/c [60,000+1,00,000] | 1,60,000 | 31-12 | By, depn– A/c | 16,000 | ||
| 2065 | By, balance c/d | 1,44,000 | |||||
| 1,60,000 | 1,60,000 | ||||||
| 1-1-2066 | To, balance b/d | 1,44,000 | 31-12 | By, depn– A/c | 16,000 | ||
| 2066 | By, balance b/d | 1,28,000 | |||||
| 1,44,000 | 1,44,000 | ||||||
| 1-1-2067 | To balance b/d | 1,28,000 | 31-12 | By, depn– A/c | 1500 | ||
| By bank A/c | 40,000 | ||||||
| Sale value | |||||||
| By, plc a/c | 6,500 | ||||||
| (loss on sale ) | |||||||
| 31-12 | By, depn– A/c | 10,000 | |||||
| 2067 | (remaining mch) | ||||||
| By, balance c/d | 70,000 | ||||||
| 1,28,000 | 1,28,000 | ||||||
| 1-1-2068 | To, balance b/d | 70,000 |
annual depn– = cost x %
100
=1,60,000×10
100
= Rs. 16,000
Working
1-1-65 60,000 6000×3
– depn– 6000 12
1-1-66 54,000 = 15000
– depn– 6000
1-1-67 48000 B. V > C. V
depn– 1500 loss
- V 46,500
C.V 40000
loss 6500
1-1-2065
For fixed assets sold
- depn– amount up to sold date – Cr. side cv- cash value
- sale value – Cr. side BV-book value
- profit loss.
- if B. V is greater than CV = loss-credit side
- if C. V is greater than BV = profit – dr. side
XYZ transportation co. motor vehicle account
- cr.
| Date | Particular | If | Amount | Date | Particular | If | Amount |
| 1-1-2006 | To bank A/c [1,40,000+1,60,000] |
3,00,000 |
31-12 | By, depn– A/c | 30,000 | ||
| 2006 | By, balance c/d |
2,70,000 |
|||||
| 3,00,000 | 3,00,000 | ||||||
| 1-1-2007 | To balance b/d | 2,70,000 | 31-12 | by, depn– A/c | 30,000 | ||
| 2007 | By, balance c/d |
2,40,000 |
|||||
| 2,70,000 | 2,70,000 | ||||||
| 1-1-2008 | To balance b/d | 2,40,000 | 1-7-
2008 |
by, depn– A/c | 8000 | ||
| (sales bus) | |||||||
| By, bank A/c | 1,32,000 | ||||||
| (S. V) | |||||||
| 1-7-2008 | To, pl A/c (profit on sale) | 12,000 | 3-12 | by, depn– A/c | 14,000 | ||
| 2008 | (ram) bus | ||||||
| By, balance c/d |
98,000 |
||||||
| 252000 |
annual depn– = cost x %
100
=300000 x 10
100
= 30,000
Working
1-1-2006 1,60,000
-depn– 16,000
1-1-2007 144000
-depn– 16000
1-1-2008 1, 28,000
-depn– 8000 =16000 x 6
B.V. 1, 20,000 12 2
S.V. 13000 =8000
profit : 12000
- cr.
| Date | Particular | If | Amount | Date | Particular | If | Amount |
| 1-4-2005 | To, bank A/c (36000+4000) | 40,000 | 31-3 | By depression A/c |
4000 |
||
| 2006 | By balance c/d | 36000 | |||||
| 40000 | 40000 | ||||||
| 1-4-2006 | To balance b/d | 36,000 | 31. 3 | By dep. A/c | 40,000 | ||
| 2007 | By balance c/d | 32,000 | |||||
| 36,000 | 36,000 | ||||||
| 1-4-2007 | To balance b/d | 32,000 | 1.10 | By dep. A/c | 300 | ||
| 2007 | (sale mach) | ||||||
| 1-10-2007 | To profit A/c | 500 | By bank A/c | 5000 | |||
| ()profit on sale) | |||||||
| 1-10-2007 | To bank A/c | 10000 | 31. 3 | By dep. A/c | 3400 | ||
| 2008 | (rem. mach) | ||||||
| By, depn– A/c | 500 | ||||||
| (new mach.) | |||||||
| By, balance c/d | 33,300 | ||||||
| 42,500 | 42500 | ||||||
| 1-4-2008 | To, balanced c/d |
33,300 |
Working
1-4-2005 6000
Depn– 600
1-4-2006 5,400
Depn– 600
1-4-2007 4,800
Depn– 300
- V. 4,500
- V. 5000
Profit 500
Remaining mach
40,000
sale = 600
34000
Diminishing Balance Method.
The value of fixed assets decrease every year. If depreciation is written off on current year book value is known as diminishing balance method. in this method the amount of depreciation is decreased every year.
R= 1-
R = 1-
10,000
= 1-4
= 1- (2)2
= 1-2 x 0.12
Where,
R = rate of depn–
N = working life of assets
S = salvage value of assets
C = cost price of the assets
Diminishing balance method is also known as reducing balance method, written down value method, reducing installment method.
Machinery account
| Date | Particular | Jf | Amount | Date | Particular | Jf | Amount |
| 1-1-1998 | To, bank A/c | 2,00,000 | 31.12-1998 | By, depn– A/c | 20,000 | ||
| By, balance c/d | 1,80,000 | ||||||
| 2,00,000 | 2,00,000 | ||||||
| 1-1-1999 | To, bank b/d | 1,80,000 | 31.12-1999 | By, depn– A/c | 18,000 | ||
| By, balance c/d | 1,62,000 | ||||||
| 1,80,000 | 1,80,000 | ||||||
| 1-1-2000 | To, balance b/d | 1,62,000 | 31.12-2000 | By, depn– A/c | 16,200 | ||
| By, balance c/d | 1,45,800 | ||||||
| 1,62,000 | 1,62,000 | ||||||
| 1-1-2001 | To, balance b/d | 1,45,800 | 31.12-2001 | By, depn– A/c | 14,580 | ||
| By, balance c/d | 1,31,220 | ||||||
| 1-1-2002 | To, balance b/d | 1,31,220 |
Machinery account
| Date | Particular | Jf | Amt. | Date | Particular | Jf | Amt. |
| 1-1-2065 | To, bank A/c [60,000+100000] | 1,60,000 | 31.12-2065 | By, depn– A/c | 16,000 | ||
| By, balance c/d | 1,44,000 | ||||||
| 1,60,000 | 1,60,000 | ||||||
| 1-1-2066 | To, balance b/d | 1,44,,000 | 31.12-2066 | By, depn– A/c | 14,400 | ||
| By, balance c/d | 1,29,600 | ||||||
| 1,44,000 | 1,44,000 | ||||||
| 1-1-2067 | To, bank b/d | 1,29,600 | 31.12-2067 | By, depn– A/c | 1,215 | ||
| By, bank A/c | 40,000 | ||||||
| (sale value) | |||||||
| By, p/l A/c | 1,385 | ||||||
| (loss on sale) | |||||||
| 31.12-2067 | By, dep- A/c (rem.) | 8100 | |||||
| By, balance c/d |
72,900 |
||||||
| 1,29,600 | 1,29,600 |
Working
1-1-2065 60,000
-depn– 6000
1-1-2066 54000
-depn– 5400
1-1-2067 48,600
-depn– 1215
- V. 47385
- V. 40000
loss 7385
remaining
129600 total
-48600 sale
81000
machinery account
| Date | Particular | Jf | Amt | Date | Particular | Jf | Amt. |
| 1-1-1999 | To, bank A/c [2,90,000+10,000] | 3,00,000 | 31.12-1999 | By, depn– A/c [30,000+5000] | 35,000 | ||
| 1-1-1999 | To, bank A/c | 1,00,000 | By, balance c/d | 3, 65,000 | |||
| 4,00,000 | 4,00,000 | ||||||
| 1-1-2000 | To, balance b/d | 36,5000 | 31.12-1999 | By, depn– A/c | 36,500 | ||
| By, balance c/d | 32,85,000 | ||||||
| 36,5000 | 36,5000 | ||||||
| 1-1-2001 | To, balance b/d | 32,8500 | 1-7-2001 | By, depn– A/c (sales mach.) | 12,150 | ||
| By, bank A/c (sale value) | 14,300 | ||||||
| 1-1 | To bank A/c | 20,000 | By, p/l A/c (loss on sale) | 87,850 | |||
| 31.12-2001 | By, depn– A/c(rem. mach.) | 8550 | |||||
| By, depn- A/c (new mach.) | 10,000 | ||||||
| By, balance c/d | 2,66,950 | ||||||
| 5,28,500 |
Working
1-1-1999 300000
-depn– 30,000
1-1-2000 270000
-depn– 2700
1-1-2001 243000
depn– 12150
- V. 230850
- V. 143000
Loss. 87850
Remaining machinery
328500
-24300
85500 x 10%
8550
1-1 to, balance b/d 266950 31.12 by, depn– A/c 266950
by, balance c/d 240225
266950 266950
- balance b/d 240225