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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
Thank You
Thank You
Thank You