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Depreciation Accounting

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Amortization

View capital asset as bundle of services Similar to prepaid expenses, cost is

expensed as company benefits from the services Land - no depreciation Plant and equipment - depreciation Natural resources - depletion Intangible assets - amortization

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Depreciation Methods

Straight line method (original cost - residual value) /service life

Accelerated methods Declining balance methods Sum of the years’ or years’ digits methods

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Declining Balance Method

Depreciation = book value * depreciation rate. Double declining balance method = book

value * 2 * straight line rate. Straight line rate = 1/(life of asset in years).

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Depreciation Methods

Commonly employed method includes..,• Straightline method• Reducing balance method

Factors in selection of method..,• Type of asset• Nature of use of such asset• Circumstances prevailing in business

Applied consistently to provide comparability Combination of more than method is sometimes used Depreciable assets which do not have material value,

depreciation is often allocated fully in accounting period in which they are acquired

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Changing Depreciation Method

Is treated as as a change in an accounting policy

Change in method is allowed if..,• Its required by statute• Compliance with an AS• Results in more appropriate preparation and presentation

of financial statements

On change in method• Depreciation is calculated using new method from the date

of asset coming into use• Deficiency or surplus on change need to be adjusted

during the year of change [charged to P&L statement]

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Components of Cost

Purchase price Import duties Non-refundable taxes or levies Directly attributable cost in bringing the asset to its working

condition..,• Site preparation• Initial delivery and handling costs• Installation costs – special foundations for plant• Professional fees – architect fees or engineers fees

Deduct trade discount and rebates from purchase price Commissioning cost.., Expenditure on test runs Expenditure on experimental production

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Components of Cost

Costs may undergo changes subsequent to acquisition due to..,• Exchange fluctuations• Price adjustments• Changes in duties or similar factors

Administration and general overheads expenses are excluded Any specific direct admin and OH expenses related to making

the asset workable is included Expenses during prolonged period between installation and

commercial start up • Will be charged to P&L statements• Treated as deferred revenue expenditure amortized over a period not

exceeding 3 to 5 years after commencement of commercial production