Accounting For Depreciation


Accounting For Depreciation

Learning Objectives:

  1. Define and explain the term “depreciation”.

  2. Why does depreciation calculated and charged?

  3. What are the different methods for providing depreciation?

Definition and Explanation of Depreciation:

The value of assets gradually reduces on account of use. Such reduction in value is known as depreciation. Different authors have given different definitions of depreciation. Click here to read full article.

Causes of Depreciation:

The main causes of depreciation may be divided into two categories, namely:

  1. Internal Cause and

  2. External Causes Click here to read full article.

Need for Depreciation:

Depreciation is a loss. So Unless it is considered like all other expenses and losses, true profit or loss cannot be ascertained. In other words, depreciation must be considered in order to find out true profit or loss of a business. Click here to read full article.

Depreciation, Depletion and Amortization:

The term depreciation is used with reference to tangible fixed assets because the permanent continuing and gradual fall in book value is possible only in the case of fixed asset. Click here to read full article.

Difference Between Depreciation and Fluctuation:

Depreciation of asset and fluctuation in its market value are not the same. For example, a businessman purchase a machine the life of which is estimated at 10 years and charges depreciation accordingly each year. If for certain reasons the market value of the machine decreases by say 20%, the businessman need not consider this decrease at all. Click here to read full article.

Basic Factors of Determination of Depreciation:

Read about the basic factors for the calculation of depreciation. Click here.

Depreciation Methods / Methods for Providing Depreciation:

Fixed assets differ from each other in their nature so widely that the same depreciation methods cannot be applied to each. Click here to read full article.

Fixed Installment Method / Straight Line Method / Original Cost Method:

Fixed installment method is also know as straight line method or original cost method. Under this method the expected life of the asset or the period during which a particular asset will render service is the calculated. Click here to read full article.

Diminishing balance/written Down Value/Reducing Installment Method of Depreciation:

Diminishing balance method is also known as written down value method or reducing installment method. Under this method the asset is depreciated at fixed percentage calculated on the debit balance of the asset which is diminished year after year on account of depreciation. Click here to read full article.

Annuity Method of Depreciation:

According to this method, the purchase of the asset concerned is considered an investment of capital, earning interest at certain rate. The cost of the asset and also interest thereon are written down annually by equal installments until the book value of the asset is reduced to nil or its bread up value at the end of its effective life. Click here to read full article.

Depreciation Fund Method or Sinking Fund Method:

Depreciation fund method is also know as sinking fund method or amortization fund method. Under this method, a fund know as depreciation fund or sinking fund is created. Click here to read full article.

Insurance Policy Method of Depreciation:

Insurance policy method is a slight modification of the depreciation fund method or sinking fund method. Under this method the amount represented by the depreciation fund, instead of being used to buy securities, is paid to an insurance company as premium. The insurance company issues a policy promising to pay a lump sum at the end of the working life of the asset for its replacement. Click here to read full article.

Revaluation Method of Depreciation:

As the name implies under revaluation method, the assets are valued at the end of each period so that the difference between the old value and the new value, which represents the actual depreciation can be charged against the profit and loss account. Click here to read full article.

Sum of the Years’ Digits Method of Depreciation:

Sum of the Years’ Digits Method an accelerated method of depreciation which is also based on the assumption that the loss in the value of the fixed asset will be greater during the earlier years and will go on decreasing gradually with the decrease in the life of such asset. Click here to read full article.

Double Declining Balance Method of Depreciation:

Double declining balance method is another type of accelerated depreciation method followed generally in USA. The depreciation expense is computed by multiplying the asset cost less accumulated depreciation by twice the straight line rate expressed in percentage. Click here to read full article.

Depletion Method of Depreciation:

Depletion method of depreciation is especially suited to mines, quarries, sand pits, etc. According to it the cost of the asset is divided by the total workable deposits. In this way, rate of depreciation per unit of output is ascertained. Depreciation in any particular year is charged on the basis of the output during that year. Click here to read full article.

Basis of Use System of Depreciation:

One of the chief factors causing depreciation is use. For example in case of plant and machinery, it is the total number of hours for which the machines work is the main factor and not their life. Click here to read full article.

Depreciation Of Various Assets:

We discuss the problem of depreciating some given assets. Click here to read full article

Depreciation Accounting – General Questions and Answers:

Find answers of some of the general questions about depreciation. Click here.

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