Depreciation Accounting Part 2 PDF

Depreciation Accounting
CPT Section A: Fundamentals of

Accounting Chapter-5
Part 2: Methods of Depreciation
CA. Poonam Patni
The Topics Already covered in Part 1

Understand the Meaning & Need of Depreciation
Causes of Depreciation
Objectives of Depreciation
Factors to be considered for Depreciation
Journal Entries for Depreciation
Learning Objectives
SLM Method
WDV Method
SOYD Method
Formula
Rationale
Advantages
Disadvantages
Journal Entry
Examples
Formula
Rationale
Advantages
Disadvantages
Journal Entry
Examples
Formula
Rationale
Advantages
Disadvantages
Journal Entry
Examples
Methods for Providing Depreciation

Straight Line Method
Reducing Balance Method
Sum of Years of Digits Method
Annuity Method
Sinking Fund Method
Insurance Policy Method
Machine Hour Method
Production Unit Method
Methods of Depreciation
Formula
Rationale
Advantages
Disadvantages
Journal Entries
Ledger
Example
Straight Line Method:- Formula

Straight Line Depreciation:-
This is
Depreciable
Amount
of Asset
Scrap
Value
Cost Cost
of Asset
Scrap
Value
Useful Life
Straight Line Depreciation Rate:Straight Line Depreciation

100
Cost Of Assets
Example: If an asset costs Rs.30000/- & rate of
depreciation is 10%
Rs.3000/- will be written off each year
Straight Line Method :- Rationale

Equal Amount
Written Off
Assets give
equal utility
through out
the life
Simplest
Way
Advantages
Simple to Apply
Accurate Results
Disadvantages
Ignores Repair & Maintenance

Assets fully written off
Journal Entries :
Particulars
Depreciation Account
Debit
Amount
Dr.
Credit
Amount
XYZ
To Asset Account
XYZ
(Being Depreciation provided on the

Assets)
Particulars
Profit & Loss Account
To Depreciation Account
(Being Depreciation provided on the
Assets)
Debit
Amount
Dr.
Credit
Amount
XYZ
XYZ
Example
Mr. Ajay Malya purchased an aircraft for bingfisher on

01.04.2012 costing Rs.30,000/-. Asset has useful life of 10
years with Nil scrap Value. Accountant Mr. Raju wants to
provide depreciation on SLM basis. Suggest him on amount of
depreciation to be charged & Leger Posting.
Straight Line Depreciation:-
Cost of Asset Scrap Value

Useful Life
30000 -
10
Rs.3,000/-
Ledger
Aircraft Account
Dr.
Date
Particulars
01/04/ To Bank/Cash
2012
Dr.
Cr.
Amount Date
(In Rs.)
Particulars
Amount
(In Rs.)
30,000
By Depreciation A/c
3,000
By Balance c/d
27,000
31/03
/2013
Cr.
Date
Particulars
Amount Date
(In Rs.)
Particulars
Amount
(In Rs.)
31/03/
2013
To Asset A/c
3000
By Profit & Loss A/c
3000
31/03
/2013
Example.2
Sharma & Co. purchased a machine on 1st July, 2011 at a
cost of Rs.60,000 and spent Rs.5,000 as its installation
expenses. The firm writes off depreciation at 10% p.a. every
year. The books are closed on 31st December every year. Show
the Machinery Account on Straight Line method for the year
2011 and 2012.
Solution
Cost of Asset:Rs.60000+Rs.5000=
Rs.65000/-
Depreciation(2011):-Rs.65000
X 10% X 6Months/12 Months
Rs.3250/-
Ledger
Dr.
Date
Machine Account
Particulars
01/07/ To Bank/Cash
2011
Cr.
Amount Date
(In Rs.)
Particulars
Amount
(In Rs.)
65000
31/12
/2011
By Depreciation A/c
3250
31/12
/2011
By Balance c/d
61750
65000
Dr.
65000
Cr.
Date
Particulars
Amount Date
(In Rs.)
Particulars
Amount
(In Rs.)
01/07/
2011
To Machine A/c
3250
3250
3250
31/12
/2011
3250
Ledger
Date
Cr.
Machine Account
Dr.
Particulars
01/01/ To Balance b/f

2012
Amount Date
(In Rs.)
Particulars
Amount
(In Rs.)
61750
By Depreciation A/c
6500
By Balance c/d
55250
31/12
/2012
61750
Dr.
Date
61750
Particulars
31/12/2 To Asset A/c

012
Cr.
Amount Date
(In Rs.)
Particulars
Amount
(In Rs.)
6500
6500
6500
31/12
/2012
6500
Reducing Balance Method

Most Commonly
Used
1-
Even prescribed by
Income Tax Act
Net residual Value

Acquisition cost
Where n = Useful life (In Years)
WDV Calculation
Assets at Net
Book Value
Assets at
Original Cost
Annual
Depreciation =
Annual
Depreciation=
Net Book Value

x
Depreciation
Rate
(Cost
Accumulated
Depreciation) x
Depreciation
Rate
Basis
Rate is Fixed
Applied on Balance at the

beginning of the year
Ram purchased a machine worth Rs. 50000/Rate of depreciation @ 10% p.a Calculate the amount of
depreciation to be charged every year.
Solution
1st year 50000*10%=5000
2nd year 50000-5000=45000

45000*10%=4500
And So On..
Rationale
Repairs increases as the assets gets old.
To give equal burden on profit
Scrap value to remain in the books at the end of life.
Advantages
Assets never
fully written
off
Considers
Repair and
Maintenance
Revenue
Charge is
uniform
Disadvantages
A too lower rate

may be adopted
Assets can remain

in the books even
after scraped
Example
L&T. acquired a machine on 1st
April, 2011 at a cost of Rs.19,000 and
spent Rs.1,000 on its installation.
The depreciation rate is 10% p.a..

The books are closed on 31st
December every year.
Show the Machinery Account

on diminishing balance
method for the year 2011
and 2012.
Calculation Of Depreciation
For 2011
=(19000+1000) x 10% x 9 /12= Rs.1500/For 2012
WDV = Original Cost Depreciation
already charged = 20000-1500 =R.18500/Depreciation = 18500 x 10% = Rs.1850/-
Machinery Account
Dr.
Date
Particular
Particular
Cr.
Amount
Date
01/04 To Bank A/c

/2011
19000
31/12/ By Depreciation
2011
A/c
1500
01/04 To Bank A/c

/2011 (Installation
Expenses)
1000
31/12/ By Balance c/d

2011
18500
20000
01/01
/2012
To Balance b/d
18500
18500
Amount
20000
31/12/ By Depreciation
2012
A/c
1850
31/12/ By Balance c/d

2012
16650
18500
Dr.
Date
Particular
Amount
Date
Particular
31/12
/2011
To Asset A/c
1500
31/12/ By P&L A/c

2011
1500
31/12
/2012
To Asset A/c
1850
1850
Amount
1500
1500
31/12/ By P&L A/c

2012
Cr.
1850
1850
DIFFERENCES
SLM
WDV
Calculated on original cost
Calculated on WDV
Depreciation is equal each year
Depreciation declines
Depreciation Charged is Lower

initially
Depreciation Charged is Higher

initially
Asset fully written off
Asset not fully written off
Does not take repair And

Maintenance into consideration
Does take repair And Maintenance

into consideration
Sum of Digits MethodFormula

Means
Depreciable
Amount
Amount to be w/o x Remaining life of assets/

Total of all digits representing the life of asset
Sum of digits = n(n+1)/2
Where n=Useful economic life (Life in Years)
Example:
Suppose the estimated life of asset is 10 year. The total of
all the digits from 1 to 10 is 55 i.e
1+2+3+4+5+6+7+8+9+10=55
N(n+1)/2 =
10*11 /2
= 55
The depreciation to be written off in the first year will be

10/55 of the cost of the asset less estimated scrap value; &
the depreciation for the 2nd year will be 9/55 of the
depreciable amount and so on
Cost of Asset = Rs.1000
Depreciation for 1st Year :- Rs.1000 x 10/55 = Rs.182/Depreciation for 2nd Year :- Rs.1000 x 9/55 = Rs.164/-
Depreciation should be charged as

follows:
Year 1
Year 2
Year 3
Year 4
(Cost Residual value) x n / Sum of digits

(Cost Residual value) x (n-1) / Sum of digits
Year n (Cost Residual value) x 1 / Sum of digits
With diminishing years of

life to run
Rationale
It provides higher depreciation to be charged in the early
years, and lower depreciation in the later periods.
Considers Repair & Maintenance
Calculated based on Ratio
Advantages
Same as WDV Method
Disadvantages
SYD depreciation method might be more confusing
and harder to compute compare to the straight line
one
Incorrect Estimated Useful life can lead to

Incorrect Depreciation
Example
Working Notes
Sum of Digits:- 10 x (10+1)/2= 55
Amount already written off as depreciation for 2007-2011
Sum of digits for these years:- 10+9+8+7+6= 40
= (Rs.2,00,000 Rs.24,000) 40/55 = 1,28,000
Written down value as on 1-1-2012
Rs.2,00,000 Rs.1,28,000 = Rs.72,000
Depreciation for 2012
(Rs.2,00,000 Rs.24,000) 5/55
= Rs.16,000.
In the books of M/s Rajnikant & Co.

Machinery Account
Dr
Date
Cr
Particular
01/01/2 To Balance b/d

012
(W.N 2)
Amount
72,000
Date
Particular
By
31/12/2
Depreciation(W.
012
N)
By Balance c/d
72,000
Amount
16,000
56,000
72,000
Date
Particular
31/12/2 To Machinery
012
Amount
Date
16,000 31/12/
2012
16,000
Particular
By P& L
Amount
16,000
16,000
Lesson Summary
SLM Method of
Depreciation
WDV Method of
Depreciation
SOYD Method of
Depreciation
Next Steps...
Please also refer following modules/parts in this series
Annuity Method
Sinking Fund Method
Insurance Policy Method
Machine Hour Method
Production Unit Method
Sale/Disposal of Assets
Revaluation of Assets
Change in Estimate Life of Asset

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What are the different methods of depreciation discussed in the document?

What are the different methods of depreciation discussed in the document?

What are some advantages and disadvantages of the straight line method?

What are some advantages and disadvantages of the straight line method?

Depreciation Accounting

CPT Section A: Fundamentals of

The Topics Already covered in Part 1

Methods for Providing Depreciation

Straight Line Method:- Formula

Straight Line Depreciation Rate:Straight Line Depreciation

Straight Line Method :- Rationale

Ignores Repair & Maintenance

(Being Depreciation provided on the

Mr. Ajay Malya purchased an aircraft for bingfisher on

Cost of Asset Scrap Value

By Profit & Loss A/c

By Profit & Loss A/c

01/01/ To Balance b/f

31/12/2 To Asset A/c

By Profit & Loss A/c

Reducing Balance Method

Net residual Value

Where n = Useful life (In Years)

Net Book Value

Applied on Balance at the

2nd year 50000-5000=45000

Repairs increases as the assets gets old.

To give equal burden on profit

Scrap value to remain in the books at the end of life.

A too lower rate

Assets can remain

The depreciation rate is 10% p.a..

Show the Machinery Account

01/04 To Bank A/c

01/04 To Bank A/c

31/12/ By Balance c/d

31/12/ By Balance c/d

31/12/ By P&L A/c

31/12/ By P&L A/c

Calculated on original cost

Depreciation is equal each year

Depreciation Charged is Lower

Depreciation Charged is Higher

Asset fully written off

Asset not fully written off

Does not take repair And

Does take repair And Maintenance

Sum of Digits MethodFormula

Amount to be w/o x Remaining life of assets/

Sum of digits = n(n+1)/2

Where n=Useful economic life (Life in Years)

The depreciation to be written off in the first year will be

Depreciation should be charged as

(Cost Residual value) x n / Sum of digits

Year n (Cost Residual value) x 1 / Sum of digits

With diminishing years of

Considers Repair & Maintenance

Calculated based on Ratio

Incorrect Estimated Useful life can lead to