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R/Sir
Depreciation is the method of calculating the cost of an asset over its lifespan.There are several methods for calculating the depreciation on fixed assets, depending upon a company's policies and purposes. The most popular methods are: straight line, double-declining balance, and sum of years.
Example :
Assets Purchase price $ 1000 Less Salvage Value $200= $800/=
Assets Life 5 Years= 800/5= $160.
Depreciation is the method of calculating the cost of an asset over its lifespan. There are several methods for calculating the depreciation on fixed assets, depending upon a company's policies and purposes. The most popular methods are: straight line, double-declining balance, and sum of years.
Please clearly indicate the following:
1. Useful life span of equipment
2. Cost of the equipment including installation+ commissioning cost
3. Expected disposal value after pre-determined life span
Then follow the company policy to determine the depreciation per year or for simplicity you may use straight line method.
Depreciation is charged to Property, plant and equipment:
Definitions:
Property, plant and equipment
Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
(b) are expected to be used during more than one period.
Depreciation
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Residual Value
The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.
Useful life
Useful life is:
(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset by an entity.
To calculate depreciation usually two methods are used, straight line method and reducing balance method.
Under the straight-line method of depreciation, recognize depreciation expense evenly over the estimated useful life of an asset. The straight-line calculation steps are:
Reducing Balance Method charges depreciation at a higher rate in the earlier years of an asset. The amount of depreciation reduces as the life of the asset progresses. Depreciation under reducing balance method may be calculated as follows:
Depreciation per annum = Net Book Value x Rate%
Where:
§ Net Book Value is the asset's net value at the start of an accounting period. It is calculated by deducting the accumulated (total) depreciation from the cost of the fixed asset.
Fixed assets include the asset that can be used for more than one year or financial period. It includes items like plant and machinery, vehicles, furniture, office equipments and so on. Since these assets will be used for more than one year, the cost should be spread over the usfellife period of the assets. You use the depreciation to allocate the cost of each year of the asset's usefulllife. There are many depreciation methods can be sued for this purpose.
1- Straight line method = (asset cost - salvage value ) / usefullife
If you have an asset with a purchase cost of $1000 and transporation cost of $100 and it's expected to be used for 5 years, and it's estimated to have a value of $300 at the end of its useful life (i.e. you expect that you can sell it at this value after 5 years) then the depreciation
= (1100-300) / 5= $160 . So you're gonna do the following entry
DR Depreciaiton expense $160 -----> (income statement)
CR Allowance for depreciation expense $160 ------> (balance sheet)
So every year the asset will be displayed at its net value on the balance sheet (historical cost minus accumulated depreciation)
2- There are some other methods like the declining balance method, sum of the years digits
You must know which Depreciation method need to apply
Usually, there are2 Depreciation methods used in Companies...
(a) Straight Line Method also called SLM method
(b) Written Down Value also called WDV method
Whereas, in SLM you must know life expectancy of Asset
Example;
Asset life expectancy4 years, say ASSET value is, then/4 = charged as depreciation over4 years
Whereas, in WDV method, it's in continuing process still asset got scraped/ sold/ impaired
Example;
Value =
Depreciation rate i.e.%
1st year*% =, Net Asset value is-=
2nd year **-=*% =, Net Asset value is-=
** value of asset is subject to addition/deletion during2nd year, if any.
(Here total accumulated Depreciation (+) posted/shown in Balance Sheet)
In turn, Depreciation charged for particular financial year in Income Statement
1st year &2nd year
Same procedure....3rd year,4th year till date of write-off, sale, scrap (or) impairment
I hope that, the above example give a basic idea about depreciation application methods.
Basically, you have asked2 question1. What is the formula for calculating depreciation ? &2. What are these Assets ?
1. There are different ways of calculating the depreciation, what are those and their formula is given below :
(i) Straight Line Method :- In this method of calculation, depreciation value is deducted at a fixed value over the whole period of depreciation.
Formula :- (Cost - Residual Value ) / Useful life
(ii) Decling Balance Method :- In this method the depreciation value changes every year over the whole period of depreciation.
Formula :- Book Value x Depreciation Rate, where Book Value = Cost - Accumulated Depreciation
(iii) Sum of Years Digits Method :- This method of depreciation is tricky & calculated on the based of age value of the Asset.
Formula :- (Cost - Salvage Value) x Fraction. If the useful lie is3 years,
for the1st year fraction will be n/ (1+2+3)
for the2nd year fraction will be (n-1)/ (1+2+3)
for the3rd year fraction will be (n-2)/(1+2+3), where 'n' is no. years of useful life
If the cost of asset is £1,,, & the salvage value is £, then for the1st year it is calculated as
1st year depreciation will be (£1,,-£,)x3/6=£,
2nd year depreciation will be (£1,,-£,)x2/6=£,
3rd year depreciation will be (£1,,-£,)x1/6 =£,
2. what are these Assets :- (i) Land & Building (ii) Machinery (iii) Vehicle (iv) Furniture & Fixtures (iv) Computers and even the 'CALCULATOR' is considered as Asset.
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Depreciation is the method of calculating the cost of an asset over its lifespan. There are several methods for calculating the depreciation on fixed assets, depending upon a company's policies and purposes. The most popular methods are: straight line, double-declining balance, and sum of years.
Using Straight Line Depreciation - Straight-line depreciation is the simplest and most popular method; it charges an equal amount of depreciation to each accounting period
1) Enter the asset's purchase price.
2) Subtract the salvage value from the purchase price to find the depreciable cost.
3) Divide the depreciable cost by the asset's lifespan to get the depreciation.
4) Determine the expected lifespan of the asset.
5) Divide 100% by the number of years in the asset life and then multiply by 2 to find the depreciation rate
Using the Double-Declining Balance Depreciation - The units-of-production depreciation method assigns an equal amount of expense to each unit produced or service rendered by the asset. This method is typically applied to assets used in the production line.
1) Determine the asset's purchase price
2) Multiply the current value of the asset by the depreciation rate.
3) Stop accumulating depreciation in any year in which the depreciable cost falls below the salvage value.
Using the Sum of Years Depreciation - Sum-of-years' digits is a depreciation method that results in a more accelerated write-off than straight line, but less accelerated than that of the double-declining balance method. Under this method, annual depreciation is determined by multiplying the depreciable cost by a series of fractions based on the sum of the asset's useful life digits.
1) Create your depreciation schedule.
2) Label the columns in the header row
3) Enter the purchase price of the asset in the first row under the Beginning Book Value column.
4) Subtract the salvage value, if any, from the original cost and enter this number in all rows under the Total Depreciable Cost column.
5) Calculate the depreciation rate.
6) Find the depreciation expense by multiplying the depreciable cost in the first year by the depreciation rate.
7) Subtract the first year's deprecation from the Beginning Book Value.
8) Fill in the rest of the schedule.
9) Check your math at the end of the schedule.
From the Auditor’s point of view: Brief note on calculation of Depreciation as per New Company’s Act 2013
♣ Following are the steps for the calculation of Depreciation on existing Asset:
1. Find out useful life as per new schedule
2. Calculate already expired useful life
3. Difference of above two
4. Take Residual life at 5% of historical cost or as per management estimate (For value exceeding 5 % technical justification is required.)
5. Depreciable Amount = Historical cost/ revalued value – Residual value as calculate in the above step 4.
6. If SLM is followed, Amount of depreciation P. a. =Depreciable amount / Remaining useful life
7. If WDV method is used, need to find out rate of depreciation by using following formula and charge depreciation accordingly.
(1-(s/c)^(1/n))*100 where S = Salvage Value, C= Carrying Amount as on 01-04-14, N= Difference of useful life as per new and old schedule
♣ Pro rata Depreciation (New Asset acquired during the year) In the 1st year
1. Calculate the period from the date of purchase to the closing of accounting year.
2. Find out rate of depreciation per annum by using useful life as per Schedule II ( comparative rates are given in the reference book based on certain percentage of residual value)
3. Calculate the depreciation for the fraction of period calculated in step 1.
In subsequent Year
1. Carrying amount as on the beginning of year.
2. If WDV method is used then find out rate of depreciation as per following formula
(1-(s/c)^(1/n))*100 where S = Salvage Value, C= Carrying Amount as on 01-04-14, N= Difference of useful life as per new and old schedule
3. If SLM is used then carrying amount is amortized over the remaining useful life.
♣ Treatment of Revaluation Reserve:
1. Additional Depreciation cannot be charged to Revaluation reserve as per new companies Act, 2013.
2. Whenever the asset is retired / disposed then already created revaluation reserve need to transfer to general reserve.
♣ Transition Provision:
1. Remaining useful life is Nil then carrying amount as on 01-04-2014 after retaining residual value need to be adjust in the opening retain earning after giving effect of deferred tax impact.
2. Alternatively, Transitional loss can be charged to profit and loss. This becomes an exceptional item as per schedule II.
♣ Change in method of calculation (From WDV to SLM or vice versa)
1. It is considered as change in the accounting policy. Effect of change should be quantified and disclosed as per AS 6.
♣ Calculation of effect of change as per As 6 are as follow:
1. Recalculation of WDV as per new method.
2. Find out difference as per old and new method.
3. Surplus/ Deficit is charged to P & Loss account.
