Depreciation Accounting

Depreciation Accounting

Depreciation is some amount of fixed asset charged to the profit & loss account. Depreciation is charged because the value of asset is decreasing with usage and it is appropriate to reduce its value.

Journal Entry for Depreciation

1.   Direct Depreciation Method

In this method depreciation is directly deducted from the plant and machinery, therefore this method gives no information about the cost of asset.

Date	Particulars	Dr	Cr
	Depreciation A/c	10,000
	Plant & Machinery		10,000

Plant              90,000          100,000

Depreciation   (10,000)      (10,000)

Net Value        80,000       90,000

2.   Accumulated Depreciation Method

Accumulated depreciation is appearing on credit side of trial balance, and such accumulated depreciation would not be shown as liability (rather deducted from cost of asset each Year). Depreciation will be accumulated & shown in statement of financial position as deduction from asset, unless

Date	Particulars	Dr	Cr
	Depreciation A/c	10,000
	Accumulated Depreciation		10,000

Plant              100,000          100,000

Depreciation   (20,000)         (10,000)

Net Value       80,000         90,000

Methods of Depreciation

There are number of method under which depreciation is calculated. Some of theses methods are listed below

1.   Straight Line Depreciation Method

In this method each year same depreciation is charged. Depreciation is calculated by the following formula

Depreciation= Depreciable Amount/Useful life

2.   Reducing Balance Depreciation Method

In reducing depreciation method, high depreciation is charged at early period and then amount of depreciation reduces with the passage of time.

Depreciation= Opening Carrying Amount x % of Depreciation

Reducing balance % (what % is to be charged) to depreciation asset in given number of years is calculated by the following formula

3.   Sum of Digit Depreciation Method

Sum of Digit Depreciation Formula

In this method a number is calculated (by following formula), that number is used as dominator for each year depreciation calculation.

Sum of Digit =n (n+1)/2

First Year Depreciation = (Reaming useful life/Sum of Digit)

Example

Year = 5

Cost= 100,000

    Calculate Depreciation

Solution

Sum of Digit =5 (5+1)/2

=5 (5+1)/2

=5 (6)/2

=15

Depreciation

First year Depreciation = 5/15 x 100,000 =33,333

2^nd year Depreciation =   4/15 x 100,000 =26,667

3^rd year depreciation =    3/15x 100,000  =20,000

4^th year Depreciation =    2/15x 100,000  =13,333

5^th Year Depreciation=     1/15 x 100,000 =6,667

4.   Output Depreciation Method

In this method depreciation is calculated by the following formula

Depreciation= (Depreciable Amount/Total Output) x Actual Output

Example

Plant Value = 140,000

Total production = 12000

Residual value= 20,000

Calculate deprecation by output methods

Solution

=[ (140,000-20,000)/12,000] x 4,000

=40,000 (Depreciation)