Depreciation is Accounting which aims to distribute cost or basic value of tangible capital assets or basic value of tangible capital assets less salvage (if any) over the estimated useful life of units in a systematic and rational manner it is a process of allocation and not valuation. Let’s see now How to calculate depreciation as per companies act 2013.
How to calculate depreciation as per companies act 2013 :
Causes :
- Wear and Tear
- Passage of time
- Change in Economic Environment
Factors Affecting :
- Historical cost (Actual Cost)
- Useful life – Estimated
- salvage – Estimated
Methods of Recording
- Charge to Asset
- Creat Provision and Charge Depreciation to Provision a/c
Depreciation Methods of Valuations :
- Straight Line Method
- Written Down value Method
- Annuity Method
- Sinking Fund Method
- Depreciation Method
- Machine Hour Method
- Prediction Unit Method
- Sum Of Years Digit Method
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How to calculate depreciation as per companies act 2013 :
Straight Line Method:
Step -1 :
Amount Of Depreciation = Original cost less Residual value/Expected useful life of the asset
Step-2
Rate of Depreciation = Amount Of Depreciation / Original Cost x 100
This Method is suitable for furniture,patent,copyrights,Trademark,lease etc
Written Down Value Method:
Rate = 1 – √Scrapvalue/cost of asset x 100
This method is suitable for Plant and machineries, Buildings etc
Annuity Method:
Fixed Amount of Depreciation = [( Original cost less scrap Value) x (Value of Annuity for given period at a given rate of Intrest)] Plus Intrest on scrap Value (if any) for a year at a given
the rate of interest.
The net charge to profit and loss account increases year after year even though the depreciation is a fixed sum.
Sinking Fund Method:
a sinking fund is created to provide a definite amount at a certain future date for a specific purpose of replacement of the asset at end of the useful life
Depreciation Method:
Depletion refers to the physical deterioration by the exhaustion of natural resources (Deposits in mines, Oil wells, Quarries. timber stand etc.)
Rate of Depreciation = Original cost less Residual Value / Useful life in terms of Productive output
Amount of Depreciation + Actual output (In units) x Rate of Depreciation per unit
Machine Hour Method:
step – 1: Calculation the rate of depreciation per hour as under :
Rate per hour = Original cost less residual value / useful life terms of effective hours
Step -2: Calculation the amount of Depreciation as under:
Amount of Depreciation = Actual hours x Rate of Depreciation per hour
The above method is considered to be appropriate for costly plant and machinery, aircraft etc
Production units method:
Under the method, depreciation is determined by comparing the annual production with the estimated total production.
Depreciable Amount = Actual production during the period / Estimated Total Production
This method is applicable to machines producing products of uniform specifications.
Sum of years digits methods :
Sum of years digits method is one of the accelerating methods of depreciation which depreciation the asset at the higher rate in the earlier years and at the lower rate in later years.
Depreciates the asset at the higher rate in the earlier years and at the lower rate in later years.
Depreciation p.a = Number of years life remaining / sum of years digits x (original cost – scrap value)