DEPRECIATION

• Reduction in the value of the fixed assets• Decrease in the value of the asset due to

its use• Gradual & permanent decrease in the

value of an asset from any cause whatsoever

FEATURES OF DEPRECIATION

• Decrease in value• Permanent decrease• Gradual decrease• Reasons of decrease (use of the asset,

passing of time, new inventions etc)

METHODS OF DEPRECIAION

• SLM – Straight Line Method / Fixed Installment Method. Amount of depreciation remains same every year till the asset value gets exhausted

• Formula used is (Total Cost – Scrap Value) / No. of years of useful life

• WDV/RBM – Written Down Value / Reducing Balance Method – Amount of depreciation is not fixed but depends upon the opening WDV. It is also known as Diminishing Balance Method

• Formula used is (Opening WDV * % age of Depreciation)

MAJOR ADJUSTMENTS• Purchase of Asset (Dr…Asset & Cr… Cash)• Sale of Asset (Dr…Cash & Cr… Asset)• Charge of Depreciation (Dr… Deprn & Cr. Asset)• Transfer of Depreciation to P/L A/c (Dr.. P/L A/c &

Cr. Deprn A/c)• Calculation of profit / loss on sale of asset

Problem No.1

• Charge depreciation @10% on SLM and prepare machinery account as on March 2009 & March 2010. Also prepare depreciation a/c. Show your workings. Other information is as follows

• Machinery “Z” was purchased on 1.4.2008 for Rs.100000/-

• Machinery “Y” was purchased on 1.4.2009 for Rs.200000/-

Problem No.2• Charge depreciation @10% on RBM and

prepare machinery account as on March 2009 & March 2010. Also prepare depreciation a/c. Show your workings. Other information is as follows

• Machinery “Z” was purchased on 1.4.2008 for Rs.100000/-

• Machinery “Y” was purchased on 1.4.2009 for Rs.200000/-

• Machinery “Z” was sold on 1.4.2009 for Rs.80000/-

Problem No.3

• X Ltd purchased a second hand machine on 1.4.2008 for Rs.500000/- and spent Rs.100000/- on its repairs. Depreciation is to be provided @10% p.a. as per SLM. This machine is sold for Rs.450000/- on 1.4.10. Calculate the profit / loss on sale of machine, show depreciation a/c & machinery A/c in the books of accounts. Working notes should also form part of your answer.

Problem No. 4X ltd has imported a machine on July 1, 2002 for

Rs.128000/- paid customs duty and freight Rs.64000/- and incurred erection charges Rs.48000/-

Another local machinery costing Rs.80000/- was purchased on January 1, 2003.

On July 1, 2004 a portion of the imported machinery (value one third) got out of order and was sold for Rs.27840.

Another machinery was purchased to replace the same for Rs.40000/-

Depreciation (FIM) to be calculated @20% p.a. Show the machinery A/c for 2002,2003 & 2004

Problem No.5ABC Ltd have imported a machine on 1st July,

2000 for Rs.160000. They also paid customs duty & freight Rs.80000/- and incurred installation charges of Rs.60000/-

Another indigenous machinery costing Rs.100000/- was purchased on 1st January 2001

On 1st July, 2002, 1/3rd of the imported machinery was sold for Rs.34800 having become obsolete. Another machinery was purchased to replace the same for Rs.50000/-

Depreciation is to be charged @20% under WDV. Show machinery A/c for all the years