JAIIB AFB Unit 4 - Depreciation and its Accounting

Depreciation Accounting

Depreciation is a method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes. It is a decrease in an asset's value caused by unfavorable market conditions. a decrease in an asset's value, may be caused by a number of other factors as well such as unfavorable market conditions, etc. Machinery, equipment, currency are some examples of assets that are likely to depreciate over a specific period of time.

Depreciation – Different Methods

• Straight line method;(cost-residual value)/ estimated useful life
• Written Down Value method or declining balance method : %age is fixed
• Accelerated Depreciation
• Sum of years’ digits method; Example, if an asset is to be depreciated over five years, add digits 5,4,3,2,1 .The total is 15.For the 1st year depreciation is 5/15,for 2nd year,4/15 , and so on

Need for depreciation

• To know correct profit
• Show correct financial position
• Make provision for replacement of assets

Factors of depreciation

• Cost of asset
• Residual value
• Life of an asset

AS-6 deals with Depreciation Accounting