Depreciation: Theory and Practice: Class 11 Account Note

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

1. wear and tear
2. depletion
3. accidents
4. fall in market price
5. efflux of time
6. change in technology

 

affecting factor for amount of depreciation

1. cost of price of assets
2. invoice price of fixed assets
3. transportation cost
4. installation or erection cost
5. import duty

 

2. estimated salvage value/scrap value of assets
3. estimated working life/useful life of assets
4. provision for income tax act/company act

methods of charging depn

1. straight line method
2. diminishing balance method
3. depreciation fund method
4. annuity method
5. 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

1. find out the amount of depreciation
2. when ./. of depreciation is given

annual depreciation = cost of assets x  %

100

1. 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.

 

1. 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

1. V 46,500

C.V                                                40000

loss                                               6500

1-1-2065

 

For fixed assets sold

1. depⁿ– amount up to sold date – Cr. side          cv- cash value
2. sale value – Cr. side BV-book value
3. profit loss.
4. if B. V is greater than CV = loss-credit side
5. if C. V is greater than BV = profit – dr. side

XYZ transportation co. motor vehicle account

1. 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

 

1. 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

1. V. 4,500
2. 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

-dep_n–                    1215

1. V. 47385
2. 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

1. V. 230850
2. 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