Accounting Standard - 6

DEPRECIATION

Table of Content

• Objective• Definition• Treatment• Method• Live Example • Industry Practice

OBJECTIVE

Primary To ascertain true profit of the business To show proper value of asset Statutory need of business

Secondary Allows businesses to analyze asset cost to

revenue Produce budgets that remain consistent,

following major expenses

Definition

• Every Tangible Asset has a useful life

• So, in book, Asset Value cannot be same throughout it’s life

time

• The amount by which asset value decreases in the period is

known as “Depreciation”

i.e Depreciation is a measure of wearing out, consumption or

other loss of value of a depreciable asset arising from use,

effusion of time or obsolescence through technology and

market changes

OR

Depreciation is a systematic and rational process of

distributing the cost of tangible assets over the life of assets

Treatment This Standard deals with depreciation accounting and applies to all

depreciable assets. An asset is called as Depreciable asset when–

• It is expected to be used for more than one accounting period

• to spread the initial price of the asset over its useful life

• Are used in production or supply of goods and services, for rental to others or for administrative purpose

• E.g. : P&M, building, Computer, Vehicles, furniture, etc.

Contd...

Treatment Exception’s Forests, plantations and similar regenerative natural

resources Wasting assets including expenditure on the exploration

for an extraction of Minerals Oils, Natural gas and similar non-regenerative resources.

Expenditure on Research and Development Goodwill and Other Intangible Assets Copyright, Patents

etc.. Live Stock with exceptions

This standard also does not apply to land unless it has a limited useful life for an enterprise.

Methods of Depreciation

1. Straight Line method2. Written down Value 3. Depletion Method

4. Machine Hour rate Method 5. Depreciation Fund Method6. Insurance Policy Method7. Annuity Method8. Replacement Method

Application of Depreciation

Example

• A company buys equipment for Rs. 10,000. It decides to depreciate the asset at cost of 20%.

• We will now see how the value looks after 5 years in the below table with both WDV and SLM method.

Year Cost Depreciation

@ 20% WDV = Cost – Depreciation

Accumulated depreciation

1st year 10,000 2000 8000 2000

2nd year 8000 1600 6400 3600

3rd year 6400 1280 5120 4880

4th year 5120 1024 4096 5904

5th year 4096 819 3276 6723

Year Cost Depreciation @ 20%

Accumulated Depreciation

SLM = Cost – Accumulated Depreciation

1st year 10,000 2000 2000 8000

2nd year 10000 2000 4000 6000

3rd year 10000 2000 6000 4000

4th year 10000 2000 8000 2000

5th year 10000 2000 10000 0

!dea cellular Ltd.

Essar Ltd.

Gujarat Gas Petronet Ltd.

• Manali Chandrakant• Ajit Gopal• Vishal More• Manoj Nair• Ashwini Patil

Team Members – Group 1

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