CMA INTERMEDIATE || DEPRECIATION ACCOUNTING || NOTES

 DEPRECIATION ACCOUNTING

What is Depreciation

Depreciation refers to a accounting method of allocating the cost of tangible assets over its useful life and its use to accounts for decline its value over time.

fixed assets like plant and machine, funiture and fixture etc. are purchase and used for production and providing services for many years and its value decreases with passage of time and utilization by normal wear and tear, change in technology, or decrease in the market value etc. so this decrease in the value must be charged prom profit and loss  accounts for calculating exact/true profit. 

this charge amount to profit and loss account is called depreciation.  

Factors affecting the amount of depreciation calculation

the following factors are affecting the amount of depreciation calculation

• Cost of assets
• Estimated Scrape value at the end of useful life of assets (if any)
• Estimated useful life of assets 

Objectives of  calculating Depreciation

The following objectives of calculating Depreciation

• Determination the true cost of production
• Determination of true financial position
• Determination of correct income measurement
• Fund of assets replacement cost

Method of calculating Depreciation

The following methods are use to calculating/ providing / charging depreciation

• straight line method (SLM)
• Written down value method (WDV)
• Unit of production method

(Note:- these are the common method of providing depreciation but some other method are also used for charging depreciation)

Straight Line Method

Under straight line method of depreciation fixed amount is write off during the working life of the assets become nil. 

this method is also known as by many name such as fixed installment method / original cost method etc.

Generally the lease hold property is depreciated under this straight line method

Value of depreciation =  Cost of assets - Scrap value 

                                          Useful life of assets

Written Down Value Method

Under written down value method a fixed percentage of reducing value of assets is written off each year.

Annual charge of depreciation is decrease year to year.

Unit of production method

Under units of production method the depreciation is charged on the basis of use or units of production.

Other Methods of Charging Depreciation

The following other methods are also used for charging depreciation on assets

• Sum of year digit method
• Machine hour method
• Depletion method
• Annuity method
• Sinking fund method

MCQ Question for Practice

1. Bad Debt Recovered Rs. 1000. It will be

 a) Credited to bad debt account

 b) Credited to Debtor 's Presonal account

 C) Debited to creditor Personal account

 d) Credited to Bad Debt Recovered account

•  Cost of a Fixed Assets of a Business Has to be written off over its

1. Natural Life
2. Accounting Life
3. Physical Life
4. Estimated Economical Life

• As 10 is Related to

1. Property Plant Equipment
2. Revenue Recognition
3. Disclouser of Accounting Policies
4. Cash Flow Statement

• Provision for Bad and Doubtful Debts is Created in anticipated of actual bad debt on the bases of 

1. Conservatism Concept
2. Full Discloser Concept
3. Business Entity Concept
4. Matching Concept

• A machine costing Rs 110000 purchases. useful life is 5 year. Scrape value Rs 10000. Calculate amount of Depreciation is to be charged every year.

1. Rs 10000
2. Rs 11000
3. Rs 12000
4. Rs 1ooo

• On 1 April 2008, the provision for doubtful Debt was Rs 21500. During the year 2008-2009, the bad debt and Recovery of bad debt were Rs 10500 and Rs 2100 respectively. The sundry debtor on 31 st march 2009 were Rs 225000.Provision  is to be made at the rate of 5% on Debtors. If on 31 march 2009, there was additional bad debt of Rs 2500 then the the provision for Doubtful Debt Will be

1. Debited to profit and loss account by Rs 11250
2. Debited to profit and loss account by Rs 2625
3. Debited to profit and loss account by Rs 3000
4. Debited to profit and loss account by Rs 900

• Bad Debt Recovered Rs. 11000. It will be
 a) Credited to bad debt account
 b) Credited to Debtor 's Personal account
 C) Debited to creditor Personal account
 d) Credited to Bad Debt Recovered account

True And False

1. Depreciation is an actual  Loss. False
2. Depreciation is charge against profit.  True
3. Bad Debt recover is credited to debtor's personal account
4. Original cost minus scrape value is the depreciated value of an assets. True
5. Reducing balance method for depreciation is follow to have a uniform charge for depreciation and repair and maintenance together.  true
6. Depreciation  is non cash and non operating  expenses which is to be provided for if there are profit.  False

Case Study Question

1. Durga pvt Ltd Purchase a Plant on 1 ,Jan 2023 for rupees 500000 and the plant had an estimated useful life of 5 yrs and a scrape value is 0. on 1 jan 2027 , the director review the estimated life and decide that the machine was probably used for futher 4 yrs. you are required to compute the amount of depreciation of each year, if company charge depreciation on straight line method. 

1. On 1 Jan 2009 , kumar ltd. purchase a second hand machine for rs. 52000 and spend rs. 2000 as shipping and forwarding charge, rs 500 installation charge, rs 500 as carriage inward, import duty of rs 5000, 1500 as repaire charge, rs 400 as brokerage to middle man and rs 100 for iron pad, it was estimated that machine will have a scrape of rs 2000 at it end of useful life after 10 year. on sept 30, 2010 repaire and renewal of rs 2000 again incurred.on june 30, 2011, the machine sold at rs, 36000.

• Determined the original cost of machine purchased
• What is the amount of profit and loss on sale of machinery
• what is the amount of annual depriciation
• what is the opening balance of the machinery account on 1/1/11

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