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    Depreciation: Concept Objectives Causes Depreciation Methods

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    Sachin Sahoo
    This document discusses concepts, objectives, causes, and methods of depreciation. It defines depreciation as the loss of usefulness or diminution of service from fixed assets over time. Depreciation is calculated to properly determine profits, maintain the value of investments, and provide for asset replacement. Causes include wear and tear, obsolescence, and the passage of time. Common depreciation methods are the straight-line, declining balance, and sum-of-years' digits methods.

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    Depreciation: Concept Objectives Causes Depreciation Methods

    Uploaded by

    Sachin Sahoo
    228 views12 pages
    This document discusses concepts, objectives, causes, and methods of depreciation. It defines depreciation as the loss of usefulness or diminution of service from fixed assets over time. Depreciation is calculated to properly determine profits, maintain the value of investments, and provide for asset replacement. Causes include wear and tear, obsolescence, and the passage of time. Common depreciation methods are the straight-line, declining balance, and sum-of-years' digits methods.

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    Depreciation

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    This document discusses concepts, objectives, causes, and methods of depreciation. It defines depreciation as the loss of usefulness or diminution of service from fixed assets over time. Depreciation is calculated to properly determine profits, maintain the value of investments, and provide for asset replacement. Causes include wear and tear, obsolescence, and the passage of time. Common depreciation methods are the straight-line, declining balance, and sum-of-years' digits methods.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    228 views12 pages

    Depreciation: Concept Objectives Causes Depreciation Methods

    Uploaded by

    Sachin Sahoo
    This document discusses concepts, objectives, causes, and methods of depreciation. It defines depreciation as the loss of usefulness or diminution of service from fixed assets over time. Depreciation is calculated to properly determine profits, maintain the value of investments, and provide for asset replacement. Causes include wear and tear, obsolescence, and the passage of time. Common depreciation methods are the straight-line, declining balance, and sum-of-years' digits methods.

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    DEPRECIATION

    CONCEPT OBJECTIVES CAUSES DEPRECIATION METHODS

    vikas vadakara

    CONCEPT

    Depreciation is the cost of lost usefulness or cost of diminution of service yield from a use of fixed assets.

    A permanent fall in the value of fixed assets arising through wear and tear from the use of those assets in business.

    vikas vadakara

    Definition

    Depreciation is a measure of the wearing out, consumption or other loss of value of depreciation asset arising from use, efflux ion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined.

    vikas vadakara

    objectives
    To calculate proper profits. To show the asset at its reasonable value To maintain the original monetary investment of the asset intact. Provision of depreciation results in some incidental advantages also. To provide for replacement of an asset. Depreciation is permitted to be deducted from profits for tax purposes.

    vikas vadakara

    Causes of Depreciation

    Internal causes: wear and tear, disuse, maintenance, change in production, restriction of production, reduced demand, technical progress & depletion. External causes: obsolescence and efflux ion of time

    vikas vadakara

    Factors in measurement of depreciation


    Total cost of asset Estimated useful service life or economic life The estimated turn-in (residual) value.

    vikas vadakara

    Methods of recording depreciation

    Straight line method or fixed installment Declining charge method or diminishing or WDV Sum of years digit method Inventory or revaluation method Annuity method Depreciation fund method Machine hour method/ Production unit method Depletion method
    vikas vadakara

    Straight line method or fixed installment


    Under this method, the same amount of depreciation is charged every year throughout the life of the asset. The formula = Total cost of acquisition - residual value

    or
    scrap value Estimated life

    r =R/C * 100; r = depreciation rate R = Amount of depreciation, C = Acquisition cost

    vikas vadakara

    Advantages of Straight line method:

    Disadvantages:

    Simple, easy to understand and to apply It provides uniform charge every year Its calculated on original cost over the life time Depreciation is not related to the usage factor It ignores the fact that in the later years of the life of the asset, efficiency of the asset declines. Loss of interest on investment in the asset is not accounted for

    vikas vadakara

    Declining charge method or diminishing value method


    Some assets become quite old are normally used for down grading. Under this method depreciation is charged at fixed rate on the reducing balance every year.

    Formula r = 1-n S/C S= Residual value C = Cost of the asset


    vikas vadakara

    Advantages:

    Disadvantages:

    its a simple method of providing depreciation as a fixed rate is applied on book-value or written down value of assets. This method is quite popular It provides uniform charge for charge for services of the asset through out the life The method is slightly complicated If the asset has no residual valu, it is very difficult to calculate the rate.

    vikas vadakara

    Sum of years digit method


    Depreciation , where the amount of depreciation goes on decreasing in the coming years. Sum of the digits used in the life of assets.

    Depreciation = No. of years (including the current year) of the remaining life of the asset
    sum of all digits of the life of asset (in years) scrap value)
    vikas vadakara

    (Original cost less

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