Page 39 - DCOM409_CONTEMPORARY_ACCOUNTING

Contemporary Accounting

Notes The balance sheet as on 31st December 2008 as prepared under CCA would show the machinery
at ` 10,50,000 as compared to ` 6 lakhs under HCA. The excess of ` 4,50,000 will be put to
“Current Cost Accounting Reserve”.
In case the company desires to show the machinery at current costs as on 31st December 2008, in
place of the historical cost, the increase of ` 7,50,000 in the value of machinery would be debited
to Machinery Account and credited to Current Cost Accounting Reserve. The increase in
depreciation amount of ` 4,00,000 will be charged to Current Cost Accounting Reserve and
credited to the Machinery Account. Thus, the net increase in the value of machinery would be
` 3,50,000 and Current Cost Accounting Reserve would also stand at ` 3,50,000.

Depreciation Adjustment

The charge to the profit and loss account for depreciation should be equal to the value of the
fixed assets consumed during the period. When the fixed assets are valued on the basis of their
net current replacement cost the charge should be based on such cost. A suitable “depreciation
adjustment” is, therefore, required in historical cost profit to determine the current cost profit.
Depreciation Adjustment may be ascertained according to any of the following two bases:
(i) On the basis of total replacement cost of the asset: According to this method “Depreciation
Adjustment” may be computed as follows:

Required Depreciation Provision for the accounting period as per CCA
Less: Depreciation charged for the accounting period as per HCA
Depreciation Adjustment

Example: On the basis of figures of previous example, the amount of depreciation
adjustment to be made in the accounts of 2008 will be ascertained as follows:
Depreciation at 10% on Current Cost of ` 17,50,000 1,75,000
Less: Depreciation charged for 2008 as per HCA 1,00,000
Depreciation Adjustment 75,000
(ii) On the basis of Average Current Cost of Assets: The depreciation adjustment in the above
illustration has been made by reference to the current cost of the asset on the balance sheet
date. However, strictly speaking, this should be done on the basis of the average current
cost of the asset during the year. The average current cost may be ascertained as follows:
(Current Cost of the asset in the beginning of the year) + (Current Cost of the asset at
the end of the year) / 2
Alternatively, depreciation for the current year may be ascertained as follows:
Depreciation for the full period (say, a year) on current cost of the asset in
the beginning of the accounting period
Add: Depreciation for half the period (say, six months) on increase in the
current costs during the year presuming that such increase was gradual
Less: Depreciation charged as per HCA
Depreciation Adjustment
The following entry will be passed for depreciation adjustment

Profit & Loss Account Dr.
To Current Cost Accounting Reserve

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