What is Depreciation? Depreciation refers to the reduction in value of tangible fixed assets due to their usage, passage of time, or accidental damage. This depreciation is both permanent and ongoing, affecting all fixed assets except land.
Some Important Terms:
Amortization: Gradual and systematic write-off of intangible assets. Depletion: Reduction in value due to extraction from quarries, mines, etc. Gradual and continuous decrease reflecting diminishing reserves.
2 th Note: & 1 1 h tan expense in the profit and d 1 Depreciation is subtracted from profit, appearing as
r installation), excluding GST. Scrapior aresidual value represents the asset's worth loss account. It's based on the historical cost of the asset (purchase, freight,
t K h a n at the end of its economic life.
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cost of Assets - estimated Scrap value
Calculation of annual = Dep! No. of years of estimated life.
Annual depreciation. Rate of Depreciation = Cost of Assets * 100 PRASHANT KIRAD
Sales / Disposal of an Asset:
When an asset is sold before it is fully depreciated, the depreciation in the year of sale is charged from the beginning of the year up to the date of sale. Treatment of Gain or Loss: If the sale value exceeds the book value (on the date of sale), it is considered a gain on sale. If the sale value is less than the book value, it is considered a loss on sale. Transfer to Profit and Loss: The gain or loss resulting from the sale is transferred to the Profit and Loss account. Entries on date of sale: 1. Depreciation (up to the date of sale): If provision is not made: Depreciation A/C Dr To Assets A/C 2th If provision is made: Depreciation A/C Dr & 1 t h To Provision for Depreciation A/C 1 1 2. Provision Related to Asset Sold (transferred if provision is made): d ra Provision for Depreciation A/C Dr i K To Assets A/C t han Provision for Depreciation A/C Dr To Provision for Depreciation A/C s a Value Method of Depreciation: PrDown Written Initial Machine Cost: ₹20,000 Depreciation Rate: 10% Calculations: 1. First Year Depreciation: Book Value: Initial Cost = ₹20,000 Depreciation: 10% of ₹20,000 = ₹2,000 Book Value after depreciation: ₹20,000 - ₹2,000 = ₹18,000. 2. Second Year Depreciation: Book Value: ₹18,000 (after 1st year depreciation) Depreciation: 10% of ₹18,000 = ₹1,800 Book Value after depreciation: ₹18,000 - ₹1,800 = ₹16,200 3. Sale Entry: Cash/Book Value To Asset Disposal Account To Output GST (if applicable, separate entries for CGST, SGST, or IGST) PRASHANT KIRAD
Top Questions Q1.A company purchased a machine for ₹50,000 on April 1, 2020. The estimated useful life of the machine is 5 years, and its estimated residual value is ₹5,000. Calculate the annual depreciation and prepare the depreciation schedule for the first three years using the Straight Line Method.
Ans: Calculation of Annual Depreciation: Cost of the Machine: ₹50,000 Residual Value: ₹5,000 Useful Life: 5 years
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Q2. A business acquired a piece of equipment for ₹30,000 on January 1,
2020. The depreciation rate is 15% per annum using the Written Down Value Method. Calculate the depreciation for the first three years. Ans: First Year Depreciation: Book Value at the Beginning: ₹30,000 Depreciation: 15% of ₹30,000 = 0.15 * ₹30,000 = ₹4,500 Book Value at the End of First Year: ₹30,000 - ₹4,500 = ₹25,500 Second Year Depreciation: Book Value at the Beginning: ₹25,500 Depreciation: 15% of ₹25,500 = 0.15 * ₹25,500 = ₹3,825 Book Value at the End of Second Year: ₹25,500 - ₹3,825 = ₹21,675 Third Year Depreciation: th Book Value at the Beginning: ₹21,675 2 1 Depreciation: 15% of ₹21,675 = 0.15 * ₹21,675 = ₹3,251.25 & th Book Value at the End of Third Year: ₹21,675 - ₹3,251.25 = ₹18,423.75 1 d 1 ira t K han s Pra
