JAIIB AFB Unit 4 - Depreciation and its Accounting

JAIIB AFB Unit 4 - Depreciation and its Accounting (Year: 2019)

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

Best JAIIB Books 2024