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DEPRECIATIONDEPRECIATION

DEPRECIATIONDEPRECIATION

Depreciation is a combination of two Depreciation is a combination of two words ‘De’ & ‘Preciation’. ‘De’ means words ‘De’ & ‘Preciation’. ‘De’ means decrease & ‘Preciation’ means Price. decrease & ‘Preciation’ means Price. Therefore Depreciation means Therefore Depreciation means decrease in the value of fixed Assets decrease in the value of fixed Assets due to its constant use.due to its constant use.

DEFINITIONSDEFINITIONS

According to R.N. Carter, According to R.N. Carter, ““Depreciation is gradual and Depreciation is gradual and permanent decrease in the value of permanent decrease in the value of an asset from any causean asset from any cause.”.”

In the words of W.Pickles, In the words of W.Pickles, ““Depreciation may be defined as Depreciation may be defined as permanent & continuous decrease in permanent & continuous decrease in the quality, quantity or the value of the quality, quantity or the value of an assetsan assets.”.”

CAUSE OF DEPRECIATIONCAUSE OF DEPRECIATION

CAUSES

CONSTANTUSE

EXPIRY OFTIME

OBSOLES-CENCE

PERMANENTFALL IN PRICE

ABNORMALFACTORS

NEED FOR DEPRECIATIONNEED FOR DEPRECIATION

For determining Net Profit or Net Loss.For determining Net Profit or Net Loss.For showing true value of assets.For showing true value of assets.Provision of funds for replacement of Provision of funds for replacement of

assets.assets.Ascertaining accurate cost of production.Ascertaining accurate cost of production.Distribution of dividend out of profit only.Distribution of dividend out of profit only.Avoiding over payment of Income Tax.Avoiding over payment of Income Tax.

METHODS OF CALCULATING METHODS OF CALCULATING DEPRECIATIONDEPRECIATION

10REPLACE-

MENT

9SUM OFYEARSDIGIT

8MACHINE

HOURRATE

7 DEPLETION 6

REVAL-UTION

5 INSURANCE

POLICY

4 DEP. FUNDMETHOD

3 ANNUITYMETHOD

2 WRITTEN

DOWNVALUE

1 FIXED

INSTAL-MENT

METHODS

FIXED INSTALMENT METHODFIXED INSTALMENT METHOD

It is the simplest method of charging It is the simplest method of charging depreciation. In this method the depreciation. In this method the value of asset is divided by the value of asset is divided by the estimated life period of the assets.estimated life period of the assets.

Suppose the value of an Suppose the value of an assets is Rs 2,00,000 & its estimated assets is Rs 2,00,000 & its estimated life is 10 years, in this case the life is 10 years, in this case the depreciation is 20,000.depreciation is 20,000.

FIXED INSTALMENT METHODFIXED INSTALMENT METHOD

This method is also known as straight This method is also known as straight line method, Original Cost Method line method, Original Cost Method and Equal Installment methodand Equal Installment method

The formula of this method is as The formula of this method is as underunder

Depreciation=Depreciation=

Cost of asset – Scrape ValueCost of asset – Scrape Value

Estimated life of assetsEstimated life of assets

WRITTEN DOWN VALUEWRITTEN DOWN VALUE

Under this method, the value of Under this method, the value of asset upon which depreciation is to be asset upon which depreciation is to be calculated is goes on diminishing, so the calculated is goes on diminishing, so the amount of depreciation to be charged amount of depreciation to be charged every year also goes on declining.every year also goes on declining.

Suppose the value of an asset is Suppose the value of an asset is Rs 2,00,000 & its rate of depreciation is Rs 2,00,000 & its rate of depreciation is 10% p.a. The value of depreciation during 10% p.a. The value of depreciation during 11stst year is Rs 20,000 & 2 year is Rs 20,000 & 2ndnd year is Rs year is Rs 18,000.18,000.

HOME ASSIGNMENTHOME ASSIGNMENT

What do you mean by Depreciation?What do you mean by Depreciation?Briefly describe the various causes of Briefly describe the various causes of

Depreciation?Depreciation?Why is it necessary for a firm to Why is it necessary for a firm to

charge Depreciation?charge Depreciation?What do you mean by Straight Line What do you mean by Straight Line

Method?Method?Define W.D.V. method?Define W.D.V. method?