Join Your Exam WhatsApp group to get regular news, updates & study materials HOW TO JOIN

Karnataka class 12 commerce Accountancy Features of depreciation

Karnataka class 12 commerce Accountancy Features of depreciation:

Karnataka class 12 commerce Accountancy Features of depreciation: Depreciation may be described as a permanent, continuing and gradual shrinkage in the book value of fixed assets. It is based on the cost of assets consumed in a business and not on its market value.

Karnataka class 12 commerce Accountancy Features of depreciation:

Karnataka class 12 commerce Accountancy Features of depreciation

Karnataka class 12 commerce Accountancy Features of depreciation:

Depreciation may be described as a permanent, continuing and gradual shrinkage in the book value of fixed assets. It is based on the cost of assets consumed in a business and not on its market value. According to Institute of Cost and Management Accounting, London (ICMA) terminology “ The depreciation is the diminution in intrinsic value of the asset due to use and/or lapse of time.” Accounting Standard-6 issued by The Institute of Chartered Accountants of India (ICAI) defines depreciation as “a measure of the wearing out, consumption or other loss of value of depreciable asset arising from use, effluxion of time or obsolescence through technology and market-change. Depreciation is allocated so as to charge fair proportion of depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is pre-determined”.

Karnataka class 12 commerce Accountancy Features of depreciation:

Depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise. Depreciation is charged in each accounting period by reference to the extent of the depreciable amount. It should be noted that the subject matter of depreciation, or its base, are ‘depreciable’ assets which:

  • “are expected to be used during more than one accounting period;
  • have a limited useful life; and
  • are held by an enterprise for use in production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business.”

Karnataka class 12 commerce Accountancy Features of depreciation:

Examples of depreciable assets are machines, plants, furnitures, buildings, computers, trucks, vans, equipments, etc. Moreover, depreciation is the allocation of ‘depreciable amount’, which is the “historical cost”, or other amount substituted for historical cost less estimated salvage value. Another point in the allocation of depreciable amount is the ‘expected useful life’ of an asset. It has been described as “either (i) the period over which a depreciable asset is expected to the used by the enterprise, or (ii) the number of production of similar units expected to be obtained from the use of the asset by the enterprise.”

Karnataka class 12 commerce Accountancy Features of depreciation:

Features of Depreciation:

Above mentioned discussion on depreciation highlights the following features of depreciation:

1. It is decline in the book value of fixed assets.

2. It includes loss of value due to effluxion of time, usage or obsolescence. For example, a business firm buys a machine for Rs. 1,00,000 on April 01, 2012. In the year 2014, a new version of the machine arrives in the market. As a result, the machine bought by the business firm becomes outdated. The resultant decline in the value of old machine is caused by obsolescence.

3. It is a continuing process.

4. It is an expired cost and hence must be deducted before calculating taxable profits. For example, if profit before depreciation and tax is Rs. 50,000, and depreciation is Rs. 10,000; profit before tax will be: (Rs.) Profit before depreciation & tax 50,000 (-) Depreciation (10,000) Profit before tax 40,000

5. It is a non-cash expense. It does not involve any cash outflow. It is the process of writing-off the capital expenditure already incurred.

Karnataka class 12 commerce Accountancy Features of depreciation:

Now you are aware that fixed assets are the assets which are used in business for more than one accounting year. Fixed assets (technically referred to as “depreciable assets”) tend to reduce their value once they are put to use. In general, the term “Depreciation” means decline in the value of a fixed assets due to use, passage of time or obsolescence. In other words, if a business enterprise procures a machine and uses it in production process then the value of machine declines with its usage. Even if the machine is not used in production process, we can not expect it to realise the same sales price due to the passage of time or arrival of a new model (obsolescence). It implies that fixed assets are subject to decline in value and this decline is technically referred to as depreciation.

Karnataka class 12 commerce Accountancy Features of depreciation:

As an accounting term, depreciation is that part of the cost of a fixed asset which has expired on account of its usage and/or lapse of time. Hence, depreciation is an expired cost or expense, charged against the revenue of a given accounting period. For example, a machine is purchased for Rs.1,00,000 on April 01, 2014. The useful life of the machine is estimated to be 10 years. It implies that the machine can be used in the production process for next 10 years till March 31, 2015. You know that by its very nature, Rs. 1,00,000 is a capital expenditure during the year 2014-15. However, when income statement (Statement of Profit and Loss) is prepared, the entire amount of Rs.1,00,000 can not be charged against the revenue for the year 2014-15, because of the reason that the capital expenditure amounting to Rs.1,00,000 is expected to derive benefits (or revenue) for 10 years and not one year. Therefore, it is logical to charge only a part of the total cost say Rs.10,000 (one tenth of Rs. 1,00,000) against the revenue for the year 2014-15. This part represents the expired cost or loss in the value of machine on account of its use or passage of time and is referred to as ‘Depreciation’. The amount of depreciation, being a charge against profit, is debited to Income Statement (Statement of Profit and Loss).

Karnataka class 12 commerce Accountancy Features of depreciation:

Depreciation and other Similar Terms There are some terms like ‘depletion’ and ‘amortisation’, which are also used in connection with depreciation. This has been due to the similar treatment given to them in accounting on the basis of similarity of their outcome, as they represent the expiry of the usefulness of different assets.

Karnataka class 12 commerce Accountancy Features of depreciation:

Factors Affecting the Amount of Depreciation The determination of depreciation depends on three parameters, viz. cost, estimated useful life and probable salvage value.

  • Cost of Asset
  • Estimated Net Residual Value
  • Depreciable Cost
  • Estimated Useful Life

Karnataka class 12 commerce Accountancy Features of depreciation:

  • Karnataka class 12 commerce Accountancy CH1 DEPRECIATION PROVISIONS AND RESERVES

Karnataka class 12 commerce Accountancy Features of depreciation:

CAKART provides India’s top class XI commerce  faculty video classes – online Classes – at very cost effective rates. Get class XI commerce Video classes from CAKART.in to do a great preparation for your exam.

Watch class XI commerce sample video lectures Visit cakart.in
Watch class XI commerce Sample Books Visit cakart.in
Watch class XI commerce free downloads Visit cakart.in

For any questions chat with us by clicking on the chat button below or give a missed call at 9980100288

Leave a comment

Your email address will not be published. Required fields are marked *