Depreciation account isc board 11th class accountbook full explain
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The accounting entry for depreciation. The basic journal entry for depreciation is to debit the Depreciation Expense account (which appears in the income statement) and credit the Accumulated Depreciation account (which appears in the balance sheet as a contra account that reduces the amount of fixed assets).
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In accounting terms, depreciation is defined as the reduction of recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible.
Types of depreciation
1) Straight-line depreciation method
This is the simplest method of all. It involves simple allocation of an even rate of depreciation every year over the useful life of the asset. The formula for straight line depreciation is:
Annual Depreciation expense = (Asset cost – Residual Value) / Useful life of the asset
Example – Suppose a manufacturing company purchases a machinery for Rs. 100,000 and the useful life of the machinery are 10 years and the residual value of the machinery is Rs. 20,000
Annual Depreciation expense = (100,000-20,000) / 10 = Rs. 8,000
Thus the company can take Rs. 8000 as the depreciation expense every year over the next ten years as shown in depreciation table below.
Year Original cost – Residual value Depreciation expense
1 Rs. 80000 Rs. 8000
2 Rs. 80000 Rs. 8000
3 Rs. 80000 Rs. 8000
4 Rs. 80000 Rs. 8000
5 Rs. 80000 Rs. 8000
6 Rs. 80000 Rs. 8000
7 Rs. 80000 Rs. 8000
8 Rs. 80000 Rs. 8000
9 Rs. 80000 Rs. 8000
10 Rs. 80000 Rs. 8000
2) Unit of Production method
This is a two-step process, unlike straight line method. Here, equal expense rates are assigned to each unit produced. This assignment makes the method very useful in assembly for production lines. Hence, the calculation is based on output capability of the asset rather than the number of years.
The steps are:
Step 1: Calculate per unit depreciation:
Per unit Depreciation = (Asset cost – Residual value) / Useful life in units of production
Step 2: Calculate the total depreciation of actual units produced:
Total Depreciation Expense = Per Unit Depreciation * Units Produced
Example: ABC company purchases a printing press to print flyers for Rs. 40,000 with a useful life of 1,80,000 units and residual value of Rs. 4000. It prints 4000 flyers.
Step 1: Per unit Depreciation = (40,000-4000)/180,000 = Rs. 0.2
Step 2: Total Depreciation expense = Rs. 0.2 * 4000 flyers = Rs. 800
So the total Depreciation expense is Rs. 800 which is accounted. Once the per unit depreciation is found out, it can be applied to future output runs.
3) Double declining method
This is one of the two common methods a company uses to account for the expenses of a fixed asset. This is an accelerated depreciation method. As the name suggests, it counts expense twice as much as the book value of the asset every year.
The formula is:
Depreciation = 2 * Straight line depreciation percent * book value at the beginning of the accounting period
Book value = Cost of the asset – accumulated depreciation
Accumulated depreciation is the total depreciation of the fixed asset accumulated up to a specified time.
Example: On April 1, 2012, company X purchased an equipment for Rs. 100,000. This is expected to have 5 useful life years. The salvage value is Rs. 14,000. Company X considers depreciation expense for the nearest whole month. Calculate the depreciation expenses for 2012, 2013, 2014 using a declining balance method.
Useful life = 5
Straight line depreciation percent = 1/5 = 0.2 or 20% per year
Depreciation rate = 20% * 2 = 40% per year
Depreciation for the year 2012 = Rs. 100,000 * 40% * 9/12 = Rs. 30,000
Depreciation for the year 2013 = (Rs. 100,000-Rs. 30,000) * 40% * 12/12 = Rs. 28,000
Depreciation for the year 2014 = (Rs. 100,000 – Rs. 30,000 – Rs. 28,000) * 40% * 9/12 = Rs. 16,800
Depreciation table is shown below:
Year Book value at the beginning Depreciation rate Depreciation Expense Book value at the end of the year
2012 Rs. 100,000 40% Rs. 30,000 * (1) Rs. 70,000
2013 Rs. 70,000 40% Rs. 28,000 * (2) Rs. 42,000
2014 Rs. 42,000 40% Rs. 16,800 * (3) Rs. 25,200
2015 Rs. 25,200 40% Rs. 10,080 * (4) Rs. 15,120
2016 Rs. 15,120 40% Rs. 1,120 * (5) Rs. 14,000
Depreciation for 2016 is Rs. 1,120 to keep the book value same as salvage value.
Rs. 15,120 – Rs. 14,000 = Rs. 1,120 (At this point the depreciation should stop).