![]() ![]() ![]() Also, this may lead to high distribution of earnings to shareholders and thus non-availability of funds when business is in need to replace the asset.The units of production depreciation formula is: Depreciation Expense = Unit Production Rate x Units Produced. Real Profit – If it is not considered then expenditure on behalf of fixed assets is not considered and the profit may be shown as a high number especially in industries required large plant and machinery.Mandatory under companies act – It is compulsory to charge depreciation in profit and loss account in companies act 2013.Tax Benefit – Depreciation is allowed as an expense under Income tax and therefore it is important to consider it to save income tax.It is then shown as a negative item in Fixed asset is balance sheet. In this method rather than reducing the value of asset another account is credited named as Accumulated depreciation and depreciation for all assets are transferred into it. There is also another method of accounting for depreciation, although it is rarely used. ![]() Thus depreciation is shown as an Indirect expense in the debit side of profit and loss account and asset’s value is to be shown after the reduction of depreciation in the balance sheet. Therefore a simple journal entry is to be passed at the end of the year. Logically an asset is expected to have a shorter life if it used extensively.Īnd thus Depreciation rate as per SLM = (100-15)/10 = 8.5%ĭepreciation is an expense and reduces the book value of an asset. In companies act the depreciation rate is also based on the number of shifts. There are also other methods of depreciation but they are not often used such as depreciation on the basis of units of production. (1,00,000 – 10,000)/10.įormula for calculating depreciation rate (SLM) = (100 – % of resale value of purchase price)/Useful life in yearsĭepreciation = Purchase Price * Depreciation Rate or (Purchase price – Salvage Value)/Useful Life 10,000 then depreciation is charged at Rs. 1,00,000 and useful life is 10 years with salvage value of Rs. In this method, equal amount of depreciation is charged on the asset over its useful life. S = Scrap value at the end of useful life of the assetĬ= Cost of the asset/Written down value of the asset N = Remaining useful life of the asset (in years) An asset gives more value to a business in initial years then later year, therefore, this method is considered as the most logical method of depreciation.įormula for calculating depreciation rate (WDV) = x 100 In the WDV method, the amount of depreciation goes on decreasing with time. This method is also called reducing balance method. 9,000 ( 10% of 90,000 ) and third year depreciation is rs. 1,00,000), second year depreciation is rs. 1,00,000 and depreciation rate is 10% then first year depreciation is rs. In this method depreciation is charged on the book value of asset and book value is decreased each year by the depreciation.For eg- Asset is purchased at rs. Also in income tax act, depreciation is allowed as per WDV method only. WDV method is the most common used method of depreciation. Although method of calculation is different under both acts and this difference also leads to creation of Deferred tax asset or deferred tax liability. For that, while calculating its operation cost, he has to consider the cost of car, its life, the resale value after useful life and add it to other expenses for calculating total cost.ĭepreciation is also allowed as an expense as per income tax act and also as per companies act. For example, a driver gives his car for tourism purpose, he has to consider the fact that car has a limited useful life and he needs to replace that after some years. Land is not subject to wear and tear and thus depreciation is not levied on land but applicable on a building.Ĭonsidering depreciation as an expense is very much required for successful financial management. For example on plant & machinery, vehicles, computers, furniture, building etc. It is applied on long term assets which give benefits for many years. The cost of the asset is allocated over time and considered as expense. Depreciation is the reduction in the value of assets due to wear and tear.Įvery asset is subject to wear and tear in the ordinary course of its use and also with the passage of time. ![]()
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