What is Depreciation-Method to calculate Depreciation

Fixed Assets:-Fixed Assets are those assets which are:

• Of  long life

• To be used in the business to generate revenue

• Not bought with the main purpose of resale.

Fixed assets are also called “Depreciable Assets”

Accumulated Depreciation:-

It is the depreciation that has been charged on a particular asset from

the time of purchase of the asset to the present time.

Amortization:-

No depreciation is charged for ‘Land’. In case of ‘Leased Asset/Lease Hold Land’ the amount paid for it is charged over the life of the lease and is called Amortization.

Methods of calculating Depreciation:-

1: Straight line method/Original cost method/Fixed installment method:-

Depreciation = (cost – Residual value) / Expected useful life of the asset

Residual value:

It is the cost of the asset after the expiry of its useful life.

2: Write Down value/Reducing method/diminishing method:-

WDV = Original cost of fixed asset – Accumulated Depreciation

Entries for Recording Disposal:-

Debit: Fixed Asset Disposal A/c

Credit: Fixed Asset Cost A/c

(With the cost of asset)

Debit: Accumulated Dep. A/c

Credit: Fixed Asset Disposal A/c

(With the depreciation accumulated to date)

Debit: Cash / Bank / Receivable A/c

Credit: Fixed Asset Disposal A/c

(With the price at which asset is sold)

METHODS OF CHARGING DEPRECIATION

Capital Work in Progress Account:-

If an asset is not completed at that time when balance sheet is prepared, all costs incurred on that asset

up to the balance sheet date are transferred to an account called Capital Work in Progress Account.

Debit: Relevant asset account

Credit: Capital work in progress account