Page 143 - DCOM101_FINANCIAL_ACCOUNTING_I

Unit 11: Depreciation Accounting

To meet out the cost of escalation, the firm should invest the amount of depreciation in the Notes

interest bearing securities. The rate of interest is 8%.
Questions

1. To go for further replacement after 10 years, how much should the fi rm charge
depreciation in the case of iron ore field ? Which method should be applied ? Reason

out the suitability of the method opted.
2. To replace the machinery recently bought after 10 years how much should be charged
as depreciation in accordance with the working hours given ? Which method is
considered to be most suitable to replace ? Why ?
3. To replace the both investments viz on the iron ore field and processing unit, how

much the firm should invest during the 10 years time span?

11.6 Summary

z Depreciation is the decrease in the value of assets at the given date due to wear and tear,

obsolescence, efflux of time, accident and exhaustion.
z Cost of assets, residual value of assets, and useful life of assets are the important factors of
depreciation.
z There are several methods for providing depreciation on fixed assets. The method of the

depreciation is selected on the basis of various factors as – types of assets, nature of business
and circumstances prevailing in the business etc.
z Under straight line method, depreciation is calculated as a fixed proportion on the original

value of the asset.
z Under written down value method, the depreciation is charged on the value of the asset
available at the beginning of the year.

11.7 Keywords

Book Value of the Asset: The value of the asset after deducting the depreciation from the value
of the asset at the beginning.
Depreciation: Continuous reduction/ decrease /diminution in the value of the asset.
Depreciation Accounting: Recording the entries of depreciation through journal, ledger accounts

of Depreciation, Fixed Asset and Profit & Loss account.
Original Value of the Asset: The value of the asset at the time of purchase or acquisition.
Scrap Value of the Asset: It is the value at the end of the life period of the asset; when the asset
cannot be put for further usage.

11.8 Self Assessment

Fill in the blanks:
1. Depreciation accounting is mainly based on the …………………. .

2. Depreciation is the permanent decrease in the value of the ………………... .
3. Depreciation is calculated on the basis of …………………. .
4. …………………… can be created for replacement of fi xed assets.

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