Depreciation

MEANING OF DEPRECIATION
Depreciation is defined as a process of allocating the cost of a fixed asset over its estimated useful life in a rational and systematic manner to allocate the cost of the asset over its useful life.
As per this definition Depreciation is charged due to following reasons 
Correct  Income Measurement
True Position Statement 
Funds for Replacement
Ascertainment of true case of production for ascertaining the cost of production. It is necessary to charge depreciation as an item of cast of production.  

CHARACTERISTICS OF DEPRECIATION
Depreciation refers to a permanent, continuous and gradual decrease in the value of a fixed asset which continues till the end of the useful life of the asset.
Depreciation is a charge against profit
Depreciation is a process of allocation of expired cost
Depreciation is not a method for valuation of asset
Total depreciation cannot exceed its depreciable value or original cost where the scrap value is nil

CAUSES OF DEPRECIATION
Physical Wear and Tear Resulting from Use
Passage of Time
Depletion
Obsolescence
Accident
Change in technology

METHODS OF DEPRECIATION
STRAIGHT LINE METHOD/FIXED INSTALLMENT METHOD 
It is called straight line method because it allocates an equal amount of Depreciation. In each of the Accounting period of service line of Assets.

WRITTEN DOWN METHOD/DIMINISHING BALANCE METHOD
Under this method a fixed percentage of the diminishing value of the Asset is written off each year so as to reduce the Asset to its break-up value at the end of its life. 

 WRITTEN DOWN METHOD/DIMINISHING BALANCE METHOD
Under this method a fixed percentage of the diminishing value of the Asset is written off each year so as to reduce the Asset to its break-up value at the end of its life. 


DIFFERENCE BETWEEN SLM AND WDV

STRAIGHT LINE METHOD  
WRITTEN DAWN VALUE METHOD
Under SLM deprecation is calculated on the original cost of fixed assets.
Under WDV method depreciation is calculated on the diminishing balance or written down value of a fixed asset.
The amount of depreciation remains constant for all years  
The amount of depreciation decreases year after year as it is calculated on remaining Book Value of the asset
At the end of the life of the asset, the vale in the asset account reduces to zero. 
At the end of the life of the asset, the balance in the asset account will not reduce to zero, it will show some value of the asset.
The combined effect on cost due to depreciation and repairs is less in the initial years but higher in the later years of the asset life. 
The combined effect on cost due to depreciation and repairs remains some what  equal throughout the period
SLM suitable for assets which get depreciated on account of expiry of working life of the asset.WDV is suitable for such assets which require more and more repairs in the later years of their working life.


These online MCQ Mock tests and MCQ questions includes all main concepts of the chapter (Depreciation) in CS foundation Financial Accounting and Auditing.

Start Exam