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BBA/BCOM 2 All right are reserved with CU-IDOL Basic Accounting Course Code: BBA/BCOM 101 Semester: Seventh SLM Unit: 7 E-Lesson: 6 www.cuidol.in Unit 7(BBA /BCOM 101)

BASIC ACCOUNTING 33 OBJECTIVES INTRODUCTION To make students aware of the basic concepts of In this unit we are going to learn about the depreciation. depreciation and its concept of applicability. To develop an understanding of methods of Under this you will learn and understand the Accounting of depreciation and its relevance for accounting methods of depreciation. companies. In this unit you will learn the scope & To make students understand the methods of compliance of depreciation. Accounting for depreciation. . www.cuidol.in Unit 7(BBAA//BBCCOM 110011)) INSTITUATllE rOigFhDtIaSrTeANreCsEeArvNeDd OwNitLhINCEUL-EIDAORNLING

Topics To Be Covered 4  Introduction of Depreciation  Meaning of Depreciation  Objective of Depreciation  Causes of Depreciation  Methods of depreciation  Accounting Treatment of depreciation www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

Introduction of Depreciation 5  Value of Fixed Assets decreases with passage of time and its utilization.  Value of the portion of asset utilized for generating revenue must be recovered during that accounting year to ascertain real income.  Portion of the cost of a fixed asset allocated to a particular accounting year is called Depreciation and is charged to Profit and Loss Account www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

Meaning of Depreciation 6  Depreciation is a charge on profits, to account for the fall in the value( notional or otherwise ) of an asset during the period of use.  Depreciation or writing off of a certain portion of an asset on an annual basis is a prudent way of savings for replacement of the asset after its useful life is over.  Since depreciation is an operating cost and therefore tax deductible, each year the saving is to the extent of (tax rate)* annual depreciation. www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

DEPRECIATION 7  Depreciation can also be looked in a different way.  Depreciation is an accounting process for the gradual conversion of the capitalized cost of fixed(tangible) assets into expense.  Similarly, intangible assets are converted into expense by amortisation.  While assets such as natural resources are converted by process called depletion. www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

8 According to American Institute of Certified Public Accountants (AICPA) ‘ Depreciation Accounting is a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less Salvage value (if any) over the estimated useful life of the unit (which ,may be a group of assets) in a systematic and rational manner. It is a process of allocation, not of valuation. Depreciation for the year is portion of the total charge under such a system that is allocated to the year’ www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

Characteristics of Depreciation 9  Related to fixed assets only  Fall in the book value of asset  Permanent decrease in the book value of an asset  Continuous decrease in the book value of an asset www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

CAUSES OF DEPRECIATION 10  Physical wear and tear  With the passage of time  Changes in economic environment  Simply Wear And Tear  Mishaps  Obsolescence  Fall In Value www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

NEED FOR PROVIDING 11 DEPRECIATION  To ascertain true results of operations  To present true and fair view of the financial position  To ascertain the true cost of production  To comply with legal requirements  To accumulate funds for replacement of assets www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

FACTORS DETERMINING THE 12 AMOUNT OF DEPRECIATION  Historical Cost  Expected useful life  Estimated residual value www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

Methods of Allocating 13 Depreciation Straight Line Method Written Down Value Method www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

‘Straight Line Method’ of 14 Depreciation  A fixed and equal amount in the form of depreciation, according to a fixed percentage on the original cost, is written-off during each accounting period over the expected useful life of the asset.  Amount of Dep. = Original Cost – Residual Value Expected Useful Life of the Asset  Rate of Dep. = Amount of Depreciation x 100 Original Cost www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

Advantages of Straight line method: 15  Simple, easy to understand and to apply  It provides uniform charge every year  It’s calculated on original cost over the life time Disadvantages of Straight line method:  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 www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

Illustration 1: 16 On 1st Jan., 2003, X Ltd. Purchased a second – hand machine for Rs.52,000/- and spent Rs. 3,000/- as shipping charges, Rs.5,000/- as import duty and Rs.2,000/- as installation charges. It was estimated that machine will have a scrap value of Rs.2,000/- at the end of its useful life which is 10 years. On 30th Sep., 2003 repairs amounted to Rs.2,000/- . On 1st July, 2005 this machine was sold for Rs.30,600/-. Prepare Machinery A/c for the first three years. www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

‘Written Down Value Method’ of 17 Depreciation  Depreciation according to a fixed percentage calculated upon the original cost (in the first year) and written down value (in subsequent years) of an asset, is written off during each accounting period over the expected useful life of the asset.  The rate of depreciation remains constant year after year whereas the amount of depreciation goes on decreasing www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

‘Written Down Value/ Diminishing 18 Balance Method’ of Depreciation  Depreciation according to a fixed percentage calculated upon the original cost (in the first year) and written down value (in subsequent years) of an asset, is written off during each accounting period over the expected useful life of the asset.  The rate of depreciation remains constant year after year whereas the amount of depreciation goes on decreasing www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

Advantages of Written Down Value/ Diminishing Balance Method: 19  it’s 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. Disadvantages of Written Down Value/ Diminishing Balance Method:  The method is slightly complicated  If the asset has no residual value, it is very difficult to calculate the rate. www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

Illustration 2: 20 On 1st Jan., 2003, X Ltd. Purchased a second – hand machine for Rs.58,000/- and spent Rs. 2,000/- on its erection. On 1st July, 2005 this machine was sold for Rs.28,600/-. Prepare Machinery A/c for the first three years according to the Written Down Value taking the depreciation rate at 10% p.a. www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

Journal Entries for 21 Depreciation 1 For Providing Depreciation Depreciation A/c Dr. To Fixed Asset A/c Dr. Dr. 2 For closure of Depreciation A/c Profit & Loss A/c To Depreciation A/c Dr. Dr. 3 On disposal of an asset (iii) For recording sale proceeds Bank A/c To Asset A/c (Iv) For transfer of balance in Asset Disposal A/c (a) In case of Profit Asset A/c To Profit & Loss A/c (b) In case of Loss Profit & Loss A/c To Asset A/c www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

Solution : (Illustration 4) Cr. Dr. Machinery A/c Rs. Date Particulars Rs. Date Particulars 22 2001 To Bank A/c 58,000 2001 By Depreciation A/c Jan.1 To Bank A/c 2,000 Dec.31 By Balance c/d 7,000 July 1 To Bank A/c 73,000 20,000 80,000 80,000 7,300 2002 To Balance b/d 73,000 2002 By Depreciation A/c Jan 1 73,000 Dec.31 By Balance c/d 65,700 73,000 2003 To Balance b/d 65,700 2003 By Bank A/c Jan.1 To Bank A/c 40,000 July 1 By Depreciation A/c 28,600 July 1 July 1 By P & L A/c 2,430 1,05,700 July 1 By Depreciation A/c Dec. 31 By Balance c/d 17,570 Dec. 31 3,710 2004 To Balance b/d 53,390 2004 By Depreciation A/c 53,390 Jan.1 To P & L A/c 3,110 Dec.31 By Balance c/d 1,05,700 Dec. 31 (Dep. Written back on account of Dec.31 change from WDV to SLM) 3,000 53,500 www.cuidol.in 56,500 56,500 Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

SUMMARY 23  Depreciation- Depreciation Accounting is a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less Salvage value (if any) over the estimated useful life of the unit (which ,may be a group of assets) in a systematic and rational manner. It is a process of allocation, not of valuation. Depreciation for the year is portion of the total charge under such a system that is allocated to the year’  Straight line method of depreciation - A fixed and equal amount in the form of depreciation, according to a fixed percentage on the original cost, is written-off during each accounting period over the expected useful life of the asset.  Written down method of depreciation:-Depreciation according to a fixed percentage calculated upon the original cost (in the first year) and written down value (in subsequent years) of an asset, is written off during each accounting period over the expected useful life of the asset. www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

Multiple Choice Questions 1 The main object of providing depreciation is: 24 (a) To calculate true profit. (b) To show true financial position. (c) To reduce tax. (d) To provide funds for replacement. 2 Depreciation arises because of: (a) Fall in the market value of an asst. (b)Physical wear and tear. (c) Fall in the value of money. (d) None of them. 3 Under the straight line method of providing depreciation it: (a) Increase every year. (b)Remain constant every year. (c) Decreases every year (d) None of them. 4 Under the diminishing balance method depreciation it: (a) Increases every year. (b) Decreases every year. (T) (c) Remain constant every year (d) None of them. Answers: 1. (a) 2.(b) 3.(b) 4. (b) Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL www.cuidol.in

Frequently Asked Questions 25 Q.1 What is Depreciation? Ans: In accounting terms, depreciation is defined as the reduction of recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible. Q.2 What are the depreciation methods? Ans: (1)Straight line method of depreciation – A fixed and equal amount in the form of depreciation, according to a fixed percentage on the original cost, is written-off during each accounting period over the expected useful life of the asset.(2)Written down method of depreciation:-Depreciation according to a fixed percentage calculated upon the original cost (in the first year) and written down value (in subsequent years) of an asset, is written off during each accounting period over the expected useful life of the asset. www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

REFERENCES 26 1. Gupta, R.L., Radhaswamy,M.(2012). Advanced Accountancy. New Delhi: Sultan Chand&Sons. 2. Maheswari S.N.,(2018). Introduction to Accounting.New Delhi: Vikas Publishing House. 3. Shukla, M.C.,Grewal, T.S.,Gupta S.C.(2007). Advanced Accounts.New Delhi:S.Chandand Company Ltd. www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL

27 THANK YOU For queries Email: [email protected] www.cuidol.in Unit 7(BBA /BCOM 101) All right are reserved with CU-IDOL