2nd year accounting Notes for I.Com Part II Depreciation

DEPRECIATION   Chapter no 05

Introductions and definitions

  

What is depreciation? Depreciation is the gradual and permanent decrease in the value of an asset is called deprecation. How much kind of factors affects deprecation? There are two factors

o Internal factor

o Wear and tear

o depletion

o External factor

o Obsolescence

o Efflux of time

o Accident 

What is wear and tear?Change in shape of assets due to its use is called wear and tear of asset. Define depletion? The process of measuring and recording the exhaustion of natural resources such as deposits, oil well is called depletion OR Decrease in the quantity of assets like mine quarries and oil

Define obsolescence The term obsolesce refers to reduction in the useful life of the assets arising from such factors as

j Technological changes

j Improvement in production

j Change in the market demand Or The process of becoming out of date or obsolete is termed as obsolescence due new investigations or change in taste of people What is amortization of assets?

the term amortization is useful for describing the process of wirting down or decrease  the long term investments in intangible assets leases holds, patents, can copyright and goodwill. What are the major objects of providing deprecation? The objectives of providing deprecation are

Ä To find out the net profit and loss account for accounting period

Ä To present a fair and value of assets on balance sheet

Ä Ascertain the true cost of production

Ä For true valuation of asset

Ä Replacement of asset

What are fixed assets? Assets which have long life and which are bought for use for long period of time like building, machinery and furniture What are tangible assets? Assets which have physical  existence and which can be seen and touched is called tangible assets Define intangible assets Assets which have no physical existence and which can be seen and touched is called intangible assets What is difference between the term fluctuation and depreciation? Depreciation is the gradual and permanent decrease in the value of an asset is called deprecation. But the value or price  of assets may rise or fall due on the account of fluctuation Define scrap value or residual value? Scrap values mean the price at which at which an assets will be sold at the end of its working life is known as scrap or residual value. What is difference between depreciation and depletion? Depreciation is the gradual and permanent decrease in the value of tangible assets And depletion is measuring and recording the exhaustion of natural resources What is difference between deprecation and amortization? Depreciation is the gradual and permanent decrease in the value of tangible assets and amortization is useful for describing the process of writing down the long term investments in intangible assets leases holds, patents, can copyright and goodwill

How many methods for deprecation? it is also called fixed installment Method,Diminishing Method and annuity Method.

Entries

• When charged depreciation

Deprecation account

   To Asset account

• Transfer to profit and account

Profit and loss account

  Deprecation account

• When sold at end at scrap value

Cash account

  Assets account

 What is fixed installment method? 

The method under which charge fixed or equal amount of deprecation each year is called fixed installment method. What are advantages of fixed installment method? These are advantages of fixed installment method first It is simple and easy to calculate and secondly the book value of asset can be reduce to zero What are disadvantages of fixed installment method?  These are disadvantages of fixed installment method first No provision for the replacement of the assets is made second not popular because charge depreciation every year same while effect of assets is decreasing  every year.

Under straight line method what formula is used to calculate deprecation? 

Annual depreciation =  Cost –scrap value

                                          Estimated life

What are other names of fixed installment method?

• Straight line method

• Original cost method

Diminishing balance method

Under this method the asset is depreciated at fixed percentage calculate on the debit balance of the asset which is diminishing year after year on account of deprecation.

What are other names of diminishing balance method? This Mehtod also called written down and Reducing installment method. What are advantages of diminishing balance method? first of all Popular because charge depreciation every year same while effect of assets is decreasing  every year and secondly no separate calculation is not required for addition and extension What are advantages of diminishing balance method? first of all this method cannot reduce the book value of an asset to zero and secondly Very high rate of depreciation would have to adopt otherwise take very long time to write off