Know more about Depreciation

Why depreciation is not charged on livestock?
Please note that in order to charge depreciation, we must know the expected life of the subject so as to distribute the cost of the stock over that period. However, in case of livestock, the life can’t be ascertained i.e. the very basis of calculation of depreciation is not available and this must be one of the reasons for not charging depreciation on livestock.
Why isn’t land depreciated?

Land is not depreciated because land is assumed to have an unlimited useful life.
Other long-lived assets such as land improvements, buildings, furnishings, equipment, etc. have limited useful lives. Therefore, the costs of those assets must be allocated to those limited accounting periods. Since land’s life is not limited, there is no need to allocate the cost of land to any accounting periods.
Goodwill:
first of all, goodwill is an intangible assets and therefore no depreciation is allowed thereon. however, one can claim the amortisation of goodwill.
goodwill can generate only under two accounting standards, namely, AS-14 & AS-26.
goodwill under AS-14 arises as a result of amalgamation of two enterprises. this is also called as resulting goodwill. SUCH GOODWILL SHALL BE WRITTEN OF OVER A PERIOD OF 5 YEARS. (MAX 5 YEARS)
goodwill under AS-26, is a deliberate purchased goodwill, means the person has valued his goodwill of the business and charged the money accordingly. SUCH GOODWILL SHALL BE WRITTEN OF OVER A PERIOD OF 10 YEARS. (MAX 10 YEARS)in your case, if it the goodwill under AS-26, then goodwill can be written off upto 2013.

A S – 6 DEPRECIATION ACCOUNTING 

Depreciation-;Depreciation is a measure of the

  Wearing out
  Consumption (or)
  Other loss of value of depreciable asset arising from use or passage of time or obsolescence of technology and Market changes.

“ Depreciation is nothing but distribution of total cost of assets over its useful life ”
Depreciable Asset :
Depreciable assets are those assets which
  Are expected to be used for more than one accounting period
  Have a limited useful life.
  Are held  by enterprise for the purpose of
 use in production of goods and services
 use in supply of goods and services
 use in Rental to others
 use in Administrative purposes
 [i.e., not for the sale in ordinary business]

Applicability of Accounting Standard: -AS-6 is applicable to all depreciable Assets Except following items

  Forests, plantations
  Wasting assets, minerals and natural gas& oils
  Expenditure on research and development
  Good will
 Livestock-cattle, animal Husbandary

Why Depreciation needs to be provided:
ü Ascertain the  True cost of operations
ü Providing current valuation of fixed assets in B/S
ü Allocation of original cost of fixed assets over it’s useful life.

Depreciable Amount:
Historical cost                               —  *****
Estimated residual value/scrap      —  (****)
Depreciable amount                          *****

Requirements for calculation of Depreciation:
 Historical cost
 Estimated useful life
 Estimated residual / scrap value of depreciable assets

Historical cost: noting but acquisition cost
(including incidental expenses necessary to bring the assets to its Present condition or location of the depreciable assets)
Ex:
if “Z” purchased a asset cost Rs.2,00,000 and after wards Z incurred Fright Rs.5,000/- and installation charge Rs.15,000/-
Ans: Historical cost —  200000+5000+15000 = 2,20,000/-

The historical cost may change due to following factors
• Change in long-term liability on account of exchange fluctuations.
• Changes in duties
• Price adjustments etc.,
• Revaluation of depreciable assets.

Estimated useful life of the Asset:- It is period over which it is expected to be used by the enterprise. Generally useful life is shorter than physical life.
The useful life depends upon the following factors.
• Legal (or) contractual limits eg:-patents, copyrights
• Repairs and maintenance policy of enterprise.
• Depends upon the number of shifts for which the asset is to be used.

Estimated Residual Value / Scrap Value: – It is the estimated value of depreciable assets at the end of its useful life. It is estimated at the time of acquisition, installation and at the time of revaluation of the assets.

Methods Of Depreciation:-
i) SLM ii) WDV
Selection of appropriate method depends up on the following factors
• Type of asset
• Nature of use of such asset
• Circumstances prevailing in the business

Selected depreciation method should be consistently applied from period to period.

Changes in depreciation Method:-Change in depreciation method is done in following conditions.
• For compliance of statute
• For compliance of AS
• For more appropriate presentation of the financial statements.

Procedure to be followed in case of change in method:-(Retrospective effect)
• Depreciation should be re-computed by applying the new method from the date of its acquisition/installation till the date of change of method.
• Difference between total depreciation under the new method and accumulated depreciation under the old method till the date of change may be surplus/deficiency
• Such resultant surplus is credited to P & L A/c under the head “Depreciation written back”
• Such resultant deficiency is charged to P & L A/c

Change in Estimated Useful Life:-When there is change in estimated useful life of assets, outstanding depreciable amount on the date of change in estimate useful life of asset should be allocated over the revised remaining useful life of assets.

Depreciation Charge on Addition to an Existing Asset:-
• If Additions is an integral part of existing asset. It is depreciated over the remaining useful life of the existing asset
• It Addition is not an integral part of existing asset. If is depreciated over the estimated useful life of the additional assets.

Addition / Extension

Integral partNon Integral part
Depreciated over the                 Depreciated over the      
Remaining useful life                 estimated useful life of          
Of existing asset after              “Additional Assets”
additionsss

Disclosures:-
• Total cost of each class of assets
• Total depreciation for the period of each class of Assets
• Accumulated Depreciation of each class of Assets
• Depreciation method
Depreciation as per Companies Act on Assets costing less than Rs. 5000

Rate of Depreciation on Assets whose Actual Cost does not exceed Rs. 5000 shall be 100%
However, where the aggregate cost of the Individual Item of Plant & Machinery costing less than Rs. 5000, constitutes more than 10% of the Total Actual Cost of Plant & Machinery, the rates of Depreciation shall be the rates specified in Schedule XIV and such Assets shall not be depreciated @100%
Points to be noted while computing Depreciation as per Companies Act
Where during any financial year, any addition has been made to any asset, or where any asset has been sold, discarded, demolished or destroyed, the depreciation as per companies act on such assets shall be calculated on a pro-rata basis from the date of such addition, or as the case may be, up to the date on which the Asset has been sold, discarded, demolished or destroyed.
The calculations of the extra depreciation as per companies act for double shift working and for triple shift working shall be made separately in the proportion of number of days for which the concern worked double shift or triple shift, as the case may be bearing to the normal number of working days during the year.

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