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1. 2. 3. Accounting standards DEPRECIATION WEAR AND TEAR

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The set of rules ,a sort of law or guide to action Relate to codification of generally accepted accounting principles(GAAP) In 1973 , an international body,namely,the international accounting standards committee,orIASCwith 16 accounting professional bodies from 9 nations The indian counterpart of the IASC ,namely the institute of chartered accountants of India( ICAI) has also formulated and issued,with the international accounting standards, the following 28 accounting standards referred to as Indian accounting standards or AS This standard was first issued in november 1985 and made mandatory from 1.4 1995 The accounting standard(AS)6,depreciation accounting,issued by the ICAI

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AS-6:DEPRECIATION ACCOUNTING According to accounting standard (AS 6) Depreciation is a measure of the wearing out , consumption or other loss of value of a depreciable asset arising from use effluxion of time or obsolescence through technology and market changes DEPRECIABLE ASSET USEFUL LIFE

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Are expected to be used during more than one accounting period Have a limited useful life Held by an enterprise for use in the production or supply of goods and services The period over which a depreciable asset is expected to be used by the enterprise The number of production or similar units expected to be obtained from the use of the asset by the enterprise DEPRECIATION CAUSES

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By contrast By expiry of time By obsolescene By depletion Permanent fall in price By abnormal factors NEED

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For determination of net profit or net loss. For showing asset at fair and true value in the balance sheet. Provision of funds for replacement of assets. Ascertaining accurate cost of production. Distribution of dividend out of profit only. FACTORS

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Total cost of the asset. Estimated useful life of the asset. Estimated scrap value. Chances to obsolescene. Addition to assets. Legal provision. CAUSES INTERNAL CAUSES:

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Wear and tear Depletion EXTERNAL CAUSES:

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Obsolescence Passage of time

ACCIDENT PERMANENT FALL IN PRICE 8. NEEDS Determination of net profit or net loss. Showing assets at fair and true value in the balance sheet. Provision of funds for replacement of assets. Ascertaining accurate cost of production. Distribution of dividend out of profit only. Avoiding over payment of income tax. 9. FACTORS OF DETERMINATION OF DEPRECIATION Original cost of fixed asset i.e., purchase price plus freight and installation expenses. Estimated amount of expenditure on repairs during the useful life. Estimated useful life of asset after which it will be discarded. Estimated residual or scrap value. Possibility of obsolescence. Interest on investment-the amount invested on purchase of asset, if it had been invested in some other investment what interest would have been earned. 10. Assessment of Depreciation

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Estimated useful life Estimated residual value Historical cost or Revalued amount

11. Methods of Depreciation 1) STRAIGHT LINE METHOD

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Amount of depreciation is fixed. Useful to assets whose service remain uniform throughout the year. For eg: Furniture & fixtures 2) WRITTEN DOWN VALUE METHOD

Rate of depreciation is fixed. 3) ANNUITY METHOD

Depreciation is calculated from annuity table. 4) SINKING FUND METHOD

The amount of depreciation created is invested outside. 5) INSURANCE POLICY METHOD

Amount of depreciation of each year is paid as an insurance premium.

12. 6) ANNUAL EVALUATION METHOD 7) KILOMETRE METHOD

Depreciation calculated on the distance run by the transportation means. 8) LABOUR HOUR RATE METHOD

Depreciation is calculated on the basis of labour hour worked. 9) GLOBAL METHOD

Depreciation is calculated on the sum of all the assets.

10) PRODUCTION UNIT METHOD

Mostly used in mines to calculate the depreciation on production. 11) STATUATORY METHOD

Depreciation value/rate is fixed by this method.

13. STRAIGHT LINE METHOD It is a very popular method because its simplicity & consistency. A fixed amount of original cost is charged as a depreciation every year. . Annual depreciation =cost of the assets- residual value Estimated economic life 14. STRAIGHT LINE METHOD DISADVANTAGES It ignores the fact that the service yielding ability of the asset fall while the repairs & maintenance cost increase with the passage of time. If an additional asset is acquired, the amount to be charged as depreciation needs to be calculated. ADVANTAGES It is simple to calculate & easy to understand. It can reduce the book value of the asset to zero. The valuation of the asset each year in the balance sheet is reasonably fair. 15. WRITTEN DOWN VALUE METHOD Amount of depreciation goes on declining every year and is recognized by income tax law. LIFE OF ASSETS 16. ESTIMATION OF WRITTEN DOWN VALUE METHOD ADVANTAGES

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Easy calculation. Balanced effect on profit or loss account of different years. Approved method by income . . tax authorities. Logical method. Suitable for assets having long . . life. DISADVANTAGES

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The value of asset can not be reduced to zero. No funds for replacement. Loss of interest. Higher rate of depreciation. Inequal burden on profit and loss account.

17. Change In Method Of Depreciation Required by statute or law Required for compiance with an accounting standards Result in more appropriate preparation and presentation of financial statement 18. Disclosure in the F.S The depreciation methods used The total depreciation for the period for each class of assets The gross amount of class of assets and related accumulated depreciation Other accounting policies ( relevant to depreciation) The depreciation rates or useful lives of assets if they are different from principal rates A change in the method of depreciation is considered as a change in accounting policy 19. Disposal of Depreciation Assets Important clarification u/s 350 of Companies Act 1956

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Depreciation should be charged even if assets remain idle Depreciation should be provided on immovable assets The number of shifts (double or multiple) for which the assets has been used should be considered for depreciation For depreciation charge , Written Down Value(WDV)-is suggested though straight line method can also be adopted

20. CONCLUSION 1. This Standard deals with depreciation accounting and applies to all depreciable assets, except the following items to which special considerations apply: (i) forests, plantations and similar regenerative natural resources; (ii) wasting assets including expenditure on the exploration for and extraction of minerals, oils, natural gas and similar non regenerative resources. (iii) expenditure on research and development; (iv) goodwill and other intangible assets; (v) live stock. This standard also does not apply to land unless it has a limited useful life for the enterprise. 21. 2. Different accounting policies for depreciation are adopted by different enterprises. Disclosure of accounting policies for depreciation followed by an enterprise is necessary to appreciate the view presented in the financial statements of the enterprise.

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