Depreciation Research Assignment Essay

INTERNAL RESEARCH ASSIGNMENT

Subject of assignment: DEPRECIATION Accounting

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Q.A house purchased on 1stJanuary, 1994 certain machinery for Rs 58,200 and spent Rs 1,800 on its hard-on. On 1stJuly, 1994 extra machinery bing Rs 20,000 was purchased. On 1stJuly, 1996 the machinery purchased on 1stJanuary, 1994 holding become disused was auctioned for Rs 28,600 and on the same day of the month fresh machinery was purchased at a cost of Rs 40,000.

Depreciation was provided for yearly on 31stDecember at the rate of 10 % on written down value. In 1997, nevertheless, the house changed this method of supplying depreciation on the original cost of the machinery.

Give the Machinery Account as it would stand at the terminal of each twelvemonth from 1994 to 1997.

Meaning OF FIXED ASSETS

Nature

These are assets held with the purpose of being used held on uninterrupted footing for the intent of bring forthing or supplying goods or services and are non held for resale in the normal class of concern. Therefore, the following are the features of Fixed Assets-

  1. They are acquired for comparatively long period for transporting on concern of the endeavor.
  2. They are non intended for resale in the ordinary class of concern.

Following are illustrations of the assets which fall in this class: Land, Building, Plant and Machinery, Furniture and Fittings, Motor Vans, etc.

Mode of Valuation

While valuing the fixed assets, the following accounting constructs are of import:

  1. The fixed assets are meant for transporting on the operations of the concern either by manner of fabricating the merchandises or bring forthing back uping services e.g. , for transporting employees or goods or merchandises purchased or sold by the company. They are non meant for resale and hence while valuing them the “ traveling concern ” construct of accounting is rather relevant. Harmonizing to this construct it is assumed that the concern will go on for a reasonably long clip to come. There is neither the purpose nor the necessity to neutralize the peculiar concern venture in the foreseeable hereafter. Fixed plus are non meant for resale and hence it will be appropriate to value the assets at cost instead than their estimated realizable value in the event of the settlement of the concern.
  1. A closely related accounting construct to the “ traveling concern ” concert is the “ cost construct ” of accounting. Harmonizing to is construct, an plus is normally entered in the accounting records at the monetary value paid to get it and this cost is the footing for all accounting for the same. On history of this construct the fixed plus should be valued at cost and subsequent addition or lessening in their market values should non be taken into history. The lone exclusion to the statement is the decline in the value of the fixed plus on history of depreciation. Therefore, the fixed assets are to be shown at cost less appropriate depreciation. The ‘cost concept’ has the advantage of conveying objectiveness in accounting. In the absence of this construct the rating of the fixed plus would hold been influenced by the personal prejudice or opinion of accounting doing deformations in the fiscal statements of the house.

The cost of the fixed plus comprises its purchase monetary value and any attributable cost of conveying the plus to its working status for its intended usage. Financing cost associating to postpone credits or to borrowed financess attributable to building or acquisition of fixed assets for the period upto the completion of building or acquisition of fixed assets should besides be included in the cost of the plus to which they relate. However, the funding cost ( including involvement ) of fixed assets purchased on a deferred recognition footing or on money borrowed for building or acquisition of fixed assets should non be capitalised to the extent that such costs relate to periods after such assets are ready to be put to utilize. The cost of a constructed fixed plus should consist those costs that relate straight to the specific plus and those that are attributable to the building

activity in general and can be allocated to the specific plus. When a fixed plus is acquired in exchange or in portion exchange of other plus, the cost of the plus acquired should be recorded either at just market value or the net book value of the plus given up, adjusted for any balancing payment or reception of hard currency or other consideration. The rating of fixed assets at cost and bear downing depreciation on cost footing creates job for replacing of these assets under inflationary conditions. As a affair of fact, on history of continued inflationary inclinations, the readying of the fiscal statements on the footing of historical cost has become mostly irrelevant for judging the fiscal place of the concern. As a consequence, there has been a turning demand by the comptrollers all over the universe that the fixed assets should be valued at their current replacing monetary value and depreciation be besides charged in regard of them consequently. Several surveies have been made in this way and the Institute of Cost and Management Accountants, London, the Institute of Chartered Accountants of India, etc. , have made suited suggestions. They have advocated for the acceptance of current accounting methods as contained in the Statement of Standard Accounting Practice 16 ( SSAP 16 ) issued by the Accounting Committee of U.K. However, this criterion has besides raised a batch of contentions. It is yet to be given acknowledgment by the Government for presentation of histories by the corporate organic structures. As such the ‘cost construct ‘ of accounting still holds good for rating of fixed assets.

Depreciation

The construct of depreciation is closely linked to the construct of concern income. In the gross bring forthing procedure the usage of long-run assets tend to devour their economic potency. At some point of clip these assets becomes useless and are disposed of and replaced. The economic potency so consumed represents the expired cost of these assets and must he recovered from the gross of the concern in order to find the income earned by the concern. Depreciation may, therefore, be defined as that part of the cost of the rise that is deducted from gross for assets ‘ services used in the Operation of a concern.

In order to hold a clear apprehension about the construct of depreciation, it will be utile to cite definitions given by some outstanding authors. Harmonizing to Pickles, ”Depreciation is the lasting and go oning decline in the quality, measure or value of an plus ” . The institute of Chartered Accountants of England and Wales defines depreciation as “ that portion of the cost of a fixed plus to its proprietors which is non recoverable when the plus is eventually put out of usage by him. Provision against this loss of capital is an built-in cost of carry oning the concern during the effectual commercial life of the plus and is non de sum of net income earned ” .

Harmonizing to Spicer and Pegler, depreciation may be defined as, “ the step exhaustion of the effectual life of an plus from any cause during a given period ” . From the above definitions, it can he concluded that depreciation is a gradual lessening in the value of an plus from cause.

CAUSES OF DEPRECIATION

The causes of depreciation are as follows:

  1. Wear and rupture

Wear and tear of the assets due to changeless use or day-to-day use of the works and machinery and furniture and fixture in the mill.

  1. Exhaustion

An plus may acquire exhausted through working. This is the instance with mineral mines. oil Wellss etc. On history of uninterrupted extraction of minerals or oil, a phase comes hen the mine or good gets wholly exhausted and nil is left.

  1. Obsolescence

Some assets are discarded before they are worn out because of changed conditions. For illustrations an old machine which is still feasible may hold to he replaced by a new machine because of the latter being more efficient and economical. Such a loss on history of new innovations or changed manners is termed as loss on history of obsolescence.

  1. Efflux of clip

Certain assets get decreased in their value with the transition of clip. This is true in instance of assets like leasehold belongingss, patents or transcript rights.

  1. Accidents

An plus may run into an accident and, hence, it may acquire depreciated in its value.

On the footing of the above causes, it can he said that depreciation is the lessening or depletion in the value of an plus due to have on and rupture, oversight of clip, obsolescence, exhaustion and accidents.

BASIC FEATURES OF DEPRECIATION

  1. The term depreciation is used merely in regard of fixed assets. Of class. the current assets may besides lose their value. Loss on history of autumn in their value is taken attention of by valuing them for Balance Sheet purposes “ at cost or market monetary value whichever is less.”
  1. Depreciation is a charge against net incomes. This means that true net income of the concern can non he ascertained without bear downing depreciation.

3.Depreciation is different from care. Care disbursals are incurred for maintaining the machine in a province of efficiency. However, any grade of care can non guarantee that the plus will ne’er make a province. of bit, Of class, good care holds this phase but it can non perfectly forestall it.

4.All fixed assets, with certain possible exclusions e.g. , land. and old-timers etc. , suffer depreciation although the procedure may he invisible or gradual.

DEPRECIATION, DEPLETION, AMORTIZATION AND DILAPIDATIONS

The term ‘depreciation ‘ is to be distinguished from other footings such as depletions, amortisation, etc. , though they are used frequently interchangeably.

Depletion

Depletion implies remotion of an available but unreplaceable resource„ g Coal from a coal mine or oil out of an oil well.

Amortization

The procedure of composing off intangible assets is termed as amortisation. Some intangible assets like patents, right of first publications, leasehold, have limited utile life. Hence, their cost must be written off over such periods.

The American Institute of Certified Public Accountants ( AICPA ) has put the difference between depreciation, depletion, and amortisation in the undermentioned words.. “ Depreciation can be distinguished from other footings with specialized significance used by comptrollers to depict the assets cost allotment processs, Depreciation is concerned with bear downing the cost of semisynthetic fixed assets to operation ( and non with finding of plus value for the balance sheet ) . Amortization relates to be allotment for intangible assets such as patent and leaseholds. The usage of the term depreciation should besides be avoided in connexion with the rating processs for securities and investments”

Decrepitudes

The term decrepitude refers to damage done to a edifice or other belongings during occupancy. When a belongings is taken on rental, is returned to the landlord he may inquire the leaseholder as per understanding to set it in every bit good status as it was at the clip it was leased out. In order to run into cost such decrepitude, a proviso may be created by debiting the belongings history with the estimated sum of decrepitude and crediting the proviso for decrepitude history. Depreciation may so he charged on the entire coat of the plus so arrived at. Any payment made subsequently on decrepitude may be debited to the proviso for decrepitude history. The balance, if any, may he transferred to gain and loss history.

Meaning OF DEPRECIATION ACCOUNTING

Depreciation Accounting is chiefly concerned with a rational and systematic distribution of cost over the estimated utile life of the plus. Harmonizing to the American Institute of Certified Public Accountants, Depreciation Accounting is ‘a system of accounting which aims to administer the cost or other basic values of the touchable capital assets less salvage Of any ) over the estimated utile life of the unit ( which may be a group of assets ) in a systematic and rational mode. It is the procedure of allotment and non of rating ” . The aim of Depreciation Accounting is to absorb the cost of utilizing the assets to different accounting periods in a manner so as to give the true figure of net income or loss made by the concern.

OBJECTIVES OF PROVIDING DEPRECIATION

The followers are aims of supplying depreciation

  1. Ascertainment of true net incomes

When an plus is purchased, it is nil more than a payment in progress for an disbursal, For illustration, if a edifice is purchased for Rs.10,000 for concern, the consequence of such a purchase will be salvaging in the cost of rent in the hereafter. But, after a certain figure of old ages, the edifice will go useless. The cost of edifice is, hence, nil except paying rent in progress for a period of old ages. If the rent had been paid, it would hold been charged as an disbursal for finding of the true net incomes, made by the concern during a peculiar period. The sum paid for the purchase of edifice should, therefore, be charged Over a period of clip for which the plus would be serviceable.

  1. Presentation of true fiscal place

The assets get depreciated in their value over a period of clip on history of assorted factors as explained before. In order to show a true province of personal businesss of the concern, the assets should ‘ be shown in the Balance sheet, at their proper values.

  1. Replacement of assets

Assetss used in the concern demand replacing after the termination of their service life. By supplying depreciation a portion of the net incomes of the concern is kept in the concern which can be used for purchase of new assets on the old fixed assets going useless.

METHODS FOR PROVIDING DEPRECIATION

The following are assorted methods for supplying depreciation:

  1. Uniform charge methods

( a ) Fixed episode method

( B ) Depletion method

( degree Celsius ) Machine hr rate method

2.Worsening charge or accelerated depreciation methods

( a ) Decreasing balance method

( B ) Sum of old ages figures method

( degree Celsius ) Double worsening method

3. Other methods

( a ) Group depreciation method

( B ) Inventory system of depreciation

( degree Celsius ) Annuity method

( vitamin D ) Depreciation fund method

( vitamin E ) Insurance policy method

Arrested development OF DEPRECIATION AMOUNT

Following are the three of import factors which should be considered for finding the sum of depreciation to be charged to the Net income and Loss Account in regard of a peculiar plus.

  1. Cost of the plus

The cost of the plus includes the invoice monetary value of the plus, less any trade price reduction plus all costs essential to convey the plus to a functional status. It should he noted that fiscal charges, such as involvement on money borrowed for the purchase of the plus, should non be included in the cost of the plus.

  1. Estimated bit value

The term bit value means the residuary or the salvage value which is estimated to be realised on history of the sale of the plus at the terminal of its utile life. In finding the bit value, the cost to be incurred in the disposal or removing of the plus should be deducted out of the entire realisable value.

  1. Estimated utile life

This is besides termed as economic life of the plus. This may be calculated in footings of old ages, hours, units of end product or other runing steps such as kilometres in instance of a cab or a truck.

Depreciation Policy

The direction has to follow a suited depreciation policy maintaining in position the undermentioned aims:

  1. Recovery of the original investing, i.e. , the acquisition cost of the plus, before the termination of the economic life of the plus.
  2. Guaranting a unvarying rate of return on investings.
  3. Generating sufficient financess for the replacing of the plus after the termination of its economic life.
  4. Deducing maximal revenue enhancement benefit.
  5. Ascertainment of right net income or loss.

The above aims can be well achieved if the direction takes attention of the undermentioned facets in fanning its depreciation policy.

  1. Choice of an appropriate method

The direction should choose an appropriate method maintaining in position the nature of the plus and the premier aim of the direction

  1. Periodic reappraisal of proviso

The pick of the method determines the sum of the direction. the depreciation and the manner of its recording. However, the direction must reexamine sporadically whether the proviso for depreciation which is being made is proper or non. Any under or over proviso in the context of changed fortunes should belongings be adjusted in the books of histories

  1. Evaluation and revelation of depreciation policy

The depreciation policy being. followed by the concern should be evaluated in the context of revenue enhancement, incidence of monetary value degree alterations, authorities ordinance etc. The consequence of any alteration in the depreciation policy in an accounting period should be quantified and disclosed in the fiscal statement of the concern.

MACHINERY ACCOUNT

Date

Particulars

AMOUNT ( RS )

Date

Particulars

AMOUNT ( RS )

1994

1994

1/1

To bank A/c ( M1 )

58,200

31/12

By depreciation A/c

7,000

1/1

To bank A/c ( hard-on )

1,800

M1=6,000

1/7

To bank A/c ( M2 )

20,000

M2=1,000

31/12

By balance c/d

73,000

M1=54,000

M2=19,000

80,000

80,000

1995

1995

1/1

To equilibrate b/d

73,000

31/12

By depreciation A/c

7,300

M1=54,000

M1=5,400

M2=19,000

M2=1,900

31/12

By balance c/d

65,700

M1=48,600

M2=17,100

73,000

73,000

1996

1996

1/1

To equilibrate b/d

65,700

1/7

By bank ( sale monetary value )

28,600

M1=48,600

1/7

By depreciation on

2,430

M2=17,100

Machinery sold ( 6 m )

1/7

To bank A/c ( M3 )

40,000

1/7

By P & A ; L A/c ( loss )

17,570

31/12

By depreciation A/c

3,710

M1=1,710

M3=2,000

31/12

By balance c/d

53,390

M2=15,390

M3=38,000

1,05,700

1,05,700

1997

1997

1/1

To equilibrate b/d

53,390

31/12

By depreciation A/c

6,000

M2=15,390

M2=2,000

M3=38,000

M3=4,000

31/12

By balance c/d

47,390

M2=13,390

M3=34,000

53,390

53,390