AS-6 DEPRECIATION ACCOUNTING

JONLEN J.R. DESAM.COM 1R/M.COM-11-06

PRESENTATION PATHMeaning & DefinitionFeatures & Causes of DepreciationDepreciable AssetsApplicability of AS-6Calculation of DepreciationMethods of DepreciationChange in method of DepreciationImportant points of AS-6

MEANING Depreciation means decline in the value of fixed

assets on a/c of use & effluxion of time.

Depreciation is a gradual, continuous & permanent decrease in the value of an asset.

It was issued in 1982 by ICAI & later on revised in 1994.

DEFINITIONAS-6,Depreciation Accounting defines depreciation as a measure of the wearing out consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology or market changes.

FEATURES & CAUSES Features of Depreciation

Depreciation is a part of operating cost.It is a reduction in the value of an asset.The decrease in the value of an asset is gradual & continious.

Causes of DepreciationPhysical wear & tearPhysical DeteriorationExpiry of legal rightsObsolescence

DEPRECIABLE ASSETS Depreciable Assets are those assets which:

1. are expected to be used for more than 1 accounting period.

2. Have a limited useful life.3. Are held for the purpose of production of goods &

services.

APPLICABILITY OF AS-6 AS-6 is applicable to all depreciable assets, except

the following:i. Forests, Plantationii. Wasting Assets, Mineralsiii.Expenditure on R & Div.Goodwillv. Live-stock cattle, Animal Husbandry

CALCULATION OF DEPRECIATION

The amount of Depreciation is calculated as under:

1)Historical cost of the asset.

2)Estimated useful life of depreciable asset.

3)Estimated residual/scrap value of depreciable assets.

METHODS OF DEPRECIATION1. Fixed Installment Method

2. Reducing Balance Method

3. Sinking Fund Method

4. Insurance Policy Method

5. Sums of the digit Method

6. Revaluation Method

7. Depletion Method

8. Machine Hour Rate Method

9. Replacement Method

CHANGES IN DEPRECIATION METHOD

Change in method of Depreciation is done in the following conditions: For compliance of status

For compliance of AS’s

For more appropriate presentation of the financial statement

The Dep method used, the total dep for the period, gross amt of dep of each class has to be disclosed in the Fin. Statements.

If the asset is revalued , the prov for dep is based on the revalued amount.

A change in method of depreciation is treated as change in an accounting policy.

Accumulated Depreciation for each class of asset

DEPRICIABLE AMOUNT Depreciable Amt= Historical Cost- ERVE.g: Cost of asset=500000, ERV=25000

Depreciable Amt = H.C –ERV =500000-25000 = 475000.Depreciable amount is allocated over the estimated

useful life of depreciable asset.

DEPRECIATION ON ADDITION/ EXTENSION Any addition or extension becomes an integral

part of the existing asset. Hence it is depreciated over the remaining useful lifeof the asset.

Depreciation on Items Below Rs 5000/- Sch 6 of Co’s Act 1956, individual items of fixed

assets below Rs 5000 should be depreciated @ 100%.

OTHER POINTS OF AS 6

When the dep asset is disposed off,discarded, demolished,destroyed; the net surplus or defecit is charged to P/L A/C.

The useful life of a depreciable asset shld be estimated after considering factors like wear & tear, obsolescence etc.

The useful life of major depreciable assets may be periodically reviewed.

CHANGE IN HISTORICAL COST

Increase or Decrease in long term liability on account of exchange fluctuations, price adjustments etc, the depreciation should be provided prospectively.

But when there is a change in historical cost due to revaluation, dep should be charged on the basis of revalued amount & on the estimat of the remaining useful life of such assets.

BIBLIOGRAPHYReferences:1) Students Guide to Accounting

Standards-D.S Rawat2) Auditing – Aruna Jha3) Financial Accounting-Chopde &

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