Artikel Depresiasi B inggris

8/17/2019 Artikel Depresiasi B inggris

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DEPRECIATION

A. Meaning and Definition

The term depreciation refers to fall in the value or utility of fixed assets

which are used in operations over the definite period of years. In other words,

depreciation is the process of spreading the cost of fixed assets over the

number of years during which benefit of the asset is received. The fall in

value or utility of fixed assets due to so many causes like wear and tear,

decay, effluxion of time or obsolescence, replacement, breakdown, fall in

market value etc.According to the Institute of Chartered Accountant of India,

"epreciation is the measure of the wearing out, consumption or other loss of

value of a depreciable asset arising from use, effluxion of time or

obsolescence through technology and market changes.

Depreciation, Depletion and Amortization

In order to correct measuring of depreciation it is essential to know the

conceptual meaning of depreciation, depletion and amorti!ation.

Depreciation epreciation is treated as a revenue loss which is recorded

when expired utility fixed assets such as plant and machinery, building and

e#uipment etc.

Depletion The term depletion refers to measure the rate of exhaustion of

the natural resources or assets such as mines, iron ore, oil wells, #uarries etc.

$hile comparing with depreciation, depletion is generally applied in the case

of natural resources to ascertain the rate of physical shrinkage but in the case

of depreciation is used to measure the fall in the value or utility of fixed assets

such as plant and machinery and other general assets.Amortization The term Amorti!ation is applied in the case of intangible

assets such as patents, copyrights, goodwill, trademarks etc., Amorti!ation is

used to measure the reduction in value of intangible assets.

Obsolescence %bsolescence means a reduction of usefulness of assets

due to technological changes, improved production methods, change in

market demand for the product or service output of the asset or legal or other

restrictions.

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. Reasons of Depreciation

&. $ear and Tear of the Asset

The long term assets are becoming less efficient and poor #uality in

operations due to the continuous usage of the asset.

'. (xhaustion

)othing will be remaining due to the continuous extraction of resources.

The resources in the oil wells, mine fields will become nothing due to

continuous extraction should be replaced by new exploration. To invest

on the new exploration in order to have continuous exploration which

re#uires the depreciation as a charge against the revenues of the fields.

(xample, %il * )atural +as Corporation td. -%)+C indulges in the

process of new oil exploration pro/ects through research pro/ects. Thenthe new pro/ects should be identified and invested by huge initial

investment outlay through the current revenues out of the existing

pro/ects on account of replacement due to depletion of resources.

0. To 1ace Technological %bsolescence

To replace the old machinery with new machinery before the expiry of

the economic life period of the asset in order to maintain the efficiency

and economy of the asset. The type writer was replaced by the electronic

typewriter during the yester periods of office automation. To replace the

old type writer which is not efficient as well as economical, should be

replaced by the new electronic typewriter through the depreciation charge

on the old one.

2. Accident

The value of the asset mainly depends upon the efficiency and economy3

which gets affected due to the accident.

C. P!rpose of C"arging Depreciation

The following are the purpose of charging depreciation of fixed assets

&. To ascertain in the true profit of the business.

'. To show the true presentation of financial position.

0. To provide fund for replacement of assets.

2. To show the assets at its reasonable value in the balance sheet.

D. #actor Affecting t"e Amo!nt of Depreciation

The following factors are to be considered while charging the amount of

depreciation

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&. The original cost of the asset.

'. The useful life of the asset.

0. (stimated scrap or residual value of the asset at the end of its life.

2. 4electing an appropriate method of depreciation.

E. Met"ods of Depreciation

The following are the various methods applied for measuring allocation

of depreciation cost

$. %traig"t &ine Met"od

This method is also termed as Constant Charge 5ethod. 6nder this

method, depreciation is charged for every year will be the constant

amount throughout the life of the asset. Accordingly depreciation is

calculated by deducting the scrap value from the original cost of an asset

and the balance is divided by the number of years estimated as the life of

the asset. The following formula for calculating the periodic depreciation

charge is

• 5erits

&. 4imple and easy to calculate.

'. %riginal cost of asset reduced up to 4crap 7alue at the end of

estimated life.

0. (stimated useful life of the asset can be estimated under this

method.

•

emerits&. It does not consider intensity of use of assets.

'. It ignores any additions or opportunity cost while calculating

depreciations.

0. It ignores effective utili!ation of fixed assets, it becomes

difficult to calculate correct depreciation rate.

2. 6nder the assumption of constant charges of maintenance of

assets it is impossible to calculate true depreciation.

• (xample

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'. (ritten Do)n *al!e Met"odThis method is also known as 1ixed 8ercentage %n eclining 9ase

5ethod -or :educing Installment 5ethod. 6nder this method

depreciation is charged at fixed rate on the reducing balance -i.e., Cost

less depreciation every year. Accordingly the amount of depreciation

gradually reducing every year. The depreciation charge in the initial

period is high depreciation charge in the initial period is high and

negligible amount in the later period of the asset. The following formula

used for computing depreciation rate under $ritten;own 7alue 5ethod.

• 5erits

&. This method is accepted by Income Tax Authorities.

'. Impact of obsolescence will be reduced at minimum level.

0. 1resh calculation is not re#uired when additions are made.

2. 6nder this method the depreciation amount is gradually

decreasing and it will affect the smoothing out of periodic profit.

• emerits

&. :esidual 7alue of the asset cannot be correctly estimated.

'. It ignores interest on investment on opportunity cost which will

lead to difficulty while determining the rate of depreciation.

0. It is difficult to ascertain the true profit because revenue

contribution of the asset are not constant.

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2. The original cost of the asset cannot be brought down to !ero.

• (xample

+. Ann!it Met"od

This method is most suitable for a firm where capital is invested in

the least hold properties. 6nder this method, while calculating the

amount of depreciation, a fixed amount of depreciation is charged for

every year of the estimated useful life of the asset in such a way that at a

fixed rate of interest is calculated on the same amount had been invested

in some other form of capital investment. In other words, depreciation is

charged for every year refers to interest losing or reduction in the original

cost of the fixed assets. 6nder the annuity method where the loss of

interest is due to the investment made in the form of an asset is

considered while calculating the depreciation. The amount of

depreciation is calculated with the help of an Annuity Table.

• (xample

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-. %ining #!nd Met"od

ike the Annuity 5ethod, the amount of depreciation is charged with

the help of 4inking 1und Table. 6nder this method an amount e#ual to

the amount written off as depreciation is invested in outside securities in

order to facilitate to replace the asset at the expiry useful life of the asset.

In other words, the amount of depreciation charged is debited to

depreciation account and an e#ual amount is credited to 4inking 1und

Account. At the estimated expiry useful life of the asset, the amount of

depreciation each year is invested in easily reali!able securities which

can be readily available for the replacement of the asset.

/. Re0al!ation or Appraisal Met"od

This method is specially designed to revalue the assets in the case of

livestock, loose tools, patents etc. This method also termed as Appraisal

5ethod. The calculation of depreciation of these assets is valued at the

end of the accounting year by comparing the opening value of the asset

of the additional if any, the difference is treated as depreciation.

• (xample

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1. Ins!rance Polic Met"od

6nder this method an asset to be replaced by taking re#uired amount

of insurance policy from an Insurance Company. A fixed premium is paid

which is e#ual to the amount of depreciation for every year. At the end of

the agreed sum, i.e., on the maturity of the policy, the amount will be

used for replacing the existing assets.

2. Depletion Met"od

epletion 5ethod is mostly used for natural resources such as

mines, #uarries, oil and gas etc. from which certain #uantity of he

resources can be obtained on the basis of the availability of minerals. The

#uantity of output exhaust to reaches a stage of depletion. The rate of

depreciation is determined on the basis of the #uantity obtained for every

year. The formula is

• (xample

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3. %!m of 4ear Digits 5%4D6 Met"od

This method also termed as 4


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7. Mac"ine 8o!r Rate Met"od

This method is similar to the epletion 5ethod but instead of taking

estimated available #uantities in advance, the working life of the machine

is estimated in terms of hours. The hourly rate of depreciation is

determined by dividing the cost of the machine minus scrap value of the

machine by the estimated total number of hours utili!ed every year.

• (xample

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%o!rce

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