Depreciation, Provisions and Reserves

Depreciation

Depreciation, Provisions, and Reserves Depreciation Depreciation is the decrease in the book value of the fixed assets due to normal wear and tear, the passage of time, changes in economic environment and expiration of legal rights. Factors affecting the amount of Depreciation. Historical cost. Expected useful life. Estimated residual value. Methods of charging Depreciation 1. Straight Line Method This method is also termed as Original cost method because depreciation is charged at a fixed percentage on the original cost of the asset. Advantages Limitations ü Simplicity. ü Equality of depreciation.ü Assets can be completely written off. ü Undue pressure in later years. ü Unapproved by tax authorities. 2. Diminishing Balance Method This method is also termed as Written down value method because the value of depreciation goes on decreasing year after year. Advantages Limitations ü Easy calculation. ü Approved by tax authorities. ü Equal charge against income.   ü Omission of the interest factor. ü Knowledge of the original cost. ü Assets cannot be completely w/off. Difference Between Provision and Reserve Basis Provision Reserves Purpose Created for a particular purpose. Not necessarily created for a particular purpose. Utilisation Cannot be utilised for the payment of dividends. Can be utilised for the payment of dividends. Disclosure in Income  Statement Shown on the debit side of Profit & Loss Account. Shown on the debit side of Profit &  Loss Appropriation Account. Disclosure in Balance  Sheet Deducted from the amount of item from which it has been created. Shown under Reserves and Surplus. Points to Remember 1. AS – 6 is applicable for Depreciation. 2) Expected useful life of a depreciable asset implies the expected number of years…

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