Depreciation Accounting

Prof. Sarbesh Mishra,

M.Com, M.Phil, PhD.
University of Delhi

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Concept of Depreciation
According to Pickles “Depreciation is the
permanent & continuing diminution in the
quality, quantity or value of an asset”.

From different definition it can be

concluded that depreciation is a gradual
decrease in the value of an asset from any
cause.

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Depreciation is loss of value of an
asset: (AS-6) of ICAI
• It is a measure of wearing out,
consumption or other loss of values of a
depreciable asset arising from use &
passage of time.
Applicability except:
• Forest, Plantations
• Wasting Assets e.g. Natural Gas
• Expenditure on R&D

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Contd…
• Goodwill
• Livestock e.g. Cattle, Animal Husbandry
Depreciation as per IT Act 1961 ( A.Y 2005-06)
• Building: 5% (Res.) / 10% (Others)
• F & F: 15%
• P & M: 20%
• Computer: 60% (Includes software)
• Intangible Assets: 25%
• Books & periodicals: 100%

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Causes of Depreciation
• Wear & Tear – Due to constant use of
P&M, F&F used in the plant.
• Exhaustion – An asset may get exhausted
through working e.g. mineral mines, oil wells etc.
• Obsolescence – Some assets are
replaced because of changed condition.
• Accident – An asset may meet an accident
& its value gets depreciated.

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Features of Depreciation
• The term depreciation is used only in respect of
fixed assets & current assets.
• Depreciation is a charge against profits. This
means true profit cannot be ascertained without
charging Depreciation.
• Depreciation is different from maintenance.
Maintenance expenses are incurred for keeping
machine in a state of efficiency.
• All fixed assets with certain exception e.g. land,
antiques etc., suffer from depreciation.

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Depreciation, Depletion, Amortization &
Dilapidations
• Depletion: Removal of an available but
irreplaceable resource such as extracting coal
from a coal mine or oil out of an oil well.
• Amortization: The process of writing off
intangible assets like patents, copy rights,
leaseholds is termed as Amortization.
• Dilapidations: The term dilapidation refers to
damage done to a building or property during
tenancy.

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Meaning of Depreciation Accounting

According to AICPA “Depreciation

Accounting is a system of accounting which
aims to distribute the cost or other basic
values of the tangible capital assets less
salvage (if any) over the estimated useful life
of the unit (which may be group of assets) in
a systematic and rational manner. It is
process of allocation & not of valuation”.

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Objectives of Providing Depreciation

1. Ascertainment of true profits:

When an asset is purchased, its nothing
more than payment in advance for an
expense. E.g. The amount paid for the
purchase of building be charged over a
period of time for which asset would be
serviceable.

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Contd….
2. Presentation of true financial
position: Assets gets depreciated in
their value, in order to present true state
of affairs of the business, the assets
should be shown at their proper values.

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Contd…
3. Replacement of Assets:
Assets needs to be replaced after the
expiry of serviceable life. By providing
depreciation a part of the profits of the
business is kept in the business which
can be used for purchase of new assets
on the old fixed assets becoming
useless.

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Fixation of Depreciation Amount

1. Cost of the Asset:

Invoice Price of the Asset ---
Less: Any trade discount ---
Add: Misc. Expenses ---
Total xxx
Misc. Expenses includes any cost incurred to
bring the assets to useable condition.

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Contd…
2. Estimated scrap value: Scrap value
means the residual or the salvage
value which is estimated to be
realised on account of the sale of
the asset at the end of its useful
life*.
* - Cost incurred in disposal or removing of the asset
should be deducted out of the total realizable
value.

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Contd…
3. Estimated Useful Life: Otherwise
termed as economic life of the
asset. This may be calculated in
terms of years, months, hours, units
of output of other operating
measures such as kilometers in
case of taxi or truck.

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Methods of Recording Depreciation

1. When Provision for Depreciation Account

is Maintained
• For Providing Depreciation:
Depreciation A/C Dr.
To provision for depreciation A/C
• For transfer of Depreciation to P/L Account
P/L Account Dr.
To Depreciation A/C

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Contd…
2. When a provision for depreciation
account is not maintained
• For providing depreciation:
Depreciation Account Dr.
To Asset Account
• For transfer of depreciation to P/L A/C
P/L Account Dr.
To Depreciation Account

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Change in the method of
Depreciation
• Change in the method of depreciation may
be desired from the current year onwards.
Then depreciation will be charged
according to new method from current
year.
• Change in the method of depreciation may
be desired from back date.

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