CHAPTER-14

DEPRECIATION
“Depreciation is gradual and permanent decrease in the value of an asset from any cause.” – Carter

Introduction:
Every fixed asset loses its value due to use or other reasons. This decline in the value of asset is known
as depreciation.

Meaning of Depreciation:
Depreciation may be described as a permanent, continuing and gradual shrinkage in the book value of fixed
assets.

Features of Depreciation:
(1) It is decline in the book value of fixed assets.
(2) It is a continuing process.
(3) It includes loss of value due to efflux ion of time, usage or obsolescence.
(4) It is an expired cost and must be deducted before calculating taxable profit.

Causes of Depreciation:
(1) Wear and tear due to use or passage of time.
(2) Obsolescence.
(3) Expiration of legal rights.
(4) Abnormal factors.

Need or Objectives of Depreciation:

(1) To ascertain the true profit or loss.
(2) For consideration of tax.
(3) To ascertain the true and fair financial position.
(4) Compliance with legal provisions.

Factors or Basis for providing Depreciation:

(1) Cost of asset.
(2) Estimated net residual value.
(3) Depreciable cost.
(4) Estimated useful life.

Methods of calculating Depreciation:

(1) Straight line method (Fixed installment method):
This method is based on the assumption of equal usage of time over asset’s entire useful life. According
to this method a fixed and equal amount is charged as depreciation in every accounting period during
the life time of an asset. Depreciation amount can be calculated by the following formula:
Depreciation = cost of asset – estimated net residual value
no. of years of expected life

(2) Written Down value method(Diminishing balance method):

In this method depreciation is charged on the book value of tha asset. The amount of
depreciation reduces year after year.

Difference between Straight line method and written down value method:
Methods of recording Depreciation:
(1) When depreciation is charged to asset account:
In this method depreciation is deducted from the asset value and charged (debited) to profit and
loss account. Journal entries for recording under this method are as follows.
(a) For purchase of an asset
Asset A/c Dr.
To Bank/ vendor A/c
(With the cost of an asset including installation expenses, freight etc.)
(b) Following entries are recorded at the end of each year
(i) Depreciation A/c Dr.
To Asset A/c
(With an amount of depreciation)
Basis Straight line method Written down value method
Charging On original cost of an asset On book value of an asset
depreciation
Amount of Fixed year after year Declines year after year
depreciation
Recognition by Not recognised Recognised
income tax law
Calculation Easy to calculate Difficult to calculate
(ii) Profit and loss A/c Dr.
To Depreciation A/c
(With an amount of depreciation)

(2) When provision for depreciation/Accumulated depreciation account is maintained:

Following journal entries are recorded at the end of each year.
(a) Depreciation A/c Dr
To provision for depreciation A/c
(With the amount of depreciation)
(b) Profit and loss A/c Dr
To depreciation A/c
(With the amount of depreciation)

Illustration – 1. Soham purchased a machinery for Rs. 1,00,000 on 1st July, 2009. Another machine was
purchased for Rs. 50,000 on 1st January, 2011. Depreciation is charged at 10% p.a. by straight line
method. Accounts are closed on 31st December each year. Pass the necessary Journal entries, show
machinery A/c and Depreciation A/c for the year 2009, 2010, 2011.
(a) When Provision for depreciation a/c is not maintained.
(b) When Provision for depreciation a/c is maintained.

Solution:
(a) When Provision for depreciation a/c is not maintained.

In the Books of Soham

Journal

Date Particulars L.F. Dr. (Rs.) Cr.(Rs.)

 2009
July 1 Machinery A/c Dr. 1,00,000
To Bank A/c 1,00,000
(Being machinery purchased for Rs. 1,00,000)
Dec 31 5,000
Depreciation A/c Dr. 5,000
To Machinery A/c
Dec 31 (Being depreciation charged to machinery A/c) 5,000
5,000
Profit and Loss A/c Dr
To Depreciation A/c
(Being depreciation amount transferred to Profit and
2010
Loss A/c)
Dec 31 10,000 1
0,000
Dec 31 10,000
10,000
Depreciation A/c Dr.
To Machinery A/c
2011 (Being depreciation charged to machinery A/c)
Jan 1 50,000
Profit and Loss A/c Dr 50,000
To Depreciation A/c
Dec 31 (Being depreciation amount transferred to Profit and
Loss A/c) 15,000
15,000
Dec 31
15,000
15,000
Machinery A/c Dr.
To Bank A/c
(Being machinery purchased )

Depreciation A/c Dr.

To Machinery A/c
(Being depreciation charged to machinery A/c)

Profit and Loss A/c Dr

To Depreciation A/c
(Being depreciation amount transferred to Profit and
Loss A/c)

Dr. Machinery A/c Cr.

Date Particulars J.F. Rs. Date Particulars J.F. Rs.

2009 2009
Jul 1 To Bank A/c (M-I) 1,00,000 Dec 31 By Depreciation A/c 5,000
Dec 31 By Balance c/d 95,000

2010 1,00,000 2010 1,00,000

Jan 1 To Balance b/d Dec 31 By Depreciation A/c
95,000 Dec 31 By Balance c/d 10,000
85,000
2011 2011
Jan 1 To Balance b/d 95,000 Dec 31 By Depreciation A/c 95,000
Jan 1 To Bank A/c( M-II) (M-I – 10,000 + M-II
Dec 31 – 5,000)
85,000
By balance c/d
50,000 15,000
2012
1,20,000
Jan 1 To balance b/d

1,35,000 1,35,000

1,20,000

Dr. Depreciation A/c Cr.

Date Particulars J.F. Rs. Date Particulars J.F Rs.

.

2009 2009
Dec 31 To Machinery A/c 5,000 Dec 31 By Profit and loss A/c 5,000

2010 5,000 2010 5,000

Jan 1 To Machinery A/c Dec 31 By Profit and loss A/c

2011 10,000 2011 10,000

Jan 1 To Machinery A/c Dec 31 By Profit and loss A/c
10,000 10,000

15,000 15,000

15,000 15,000

(b) When Provision for depreciation A/c is maintained.

In the Books of Soham
Journal

Date Particulars L.F. Dr. (Rs.) Cr.(Rs.)

2009
July 1 Machinery A/c Dr. 1,00,000
To Bank A/c 1,00,000
(Being machinery purchased for Rs. 1,00,000)
Dec 31 5,000
Depreciation A/c Dr. 5,000
To Provision for Depreciation A/c
 Dec 31 (Being depreciation charged to machinery A/c) 5,000
5,000
Profit and Loss A/c Dr
2010 To Depreciation A/c
Dec 31 (Being depreciation amount transferred to Profit and 10,000
Loss A/c) 10,000
Depreciation A/c Dr.
Dec 31 10,000
To Machinery A/c
10,000
(Being depreciation charged to machinery A/c)

Profit and Loss A/c Dr

2011 To Depreciation A/c
Jan 1 (Being depreciation amount transferred to Profit and 50,000
Loss A/c) 50,000

Dec 31 15,000
Machinery A/c Dr. 15,000
To Bank A/c
Dec 31 (Being machinery purchased for Rs. 1,00,000) 15,000
15,000
Depreciation A/c Dr.
To Provision for Depreciation A/c
(Being depreciation charged to machinery A/c)

Profit and Loss A/c Dr

To Depreciation A/c
(Being depreciation amount transferred to Profit and
Loss A/c)

Dr. Machinery A/c Cr.

Date Particulars J.F. Rs. Date Particulars J.F. Rs.

2009 2009
Jul 1 To Bank A/c (M-I) 1,00,000 Dec 31 By Balance c/d 1,00,000

2010 1,00,000 2010 1,00,000

Jan 1 To Balance b/d Dec 31 By Balance c/d
1,00,000 1,00,000
2011 2011
Jan 1 To Balance b/d 1,00,000 Dec 31 By balance c/d 1,00,000
Jan 1 To Bank A/c( M-II)
 1,00,000 1,50,000
2012 50,000
Jan 1 To balance b/d

1,50,000 1,50,000

1,50,000

Dr. Provision for Depreciation A/c Cr.

Date Particulars J.F. Rs. Date Particulars J.F. Rs.

2009 2009
Dec 31 To Balance c/d 5,000 Dec 31 By Depreciation A/c 5,000

2010 5,000 2010 5,000

Dec 31 To Balance c/d Jan 1 By Balance b/d
Dec 31 By Depreciation A/c
15,000 5,000
10,000
2011 2011
Jan 1 To Balance c/d 15,000 Jan 1 By balance b/d 15,000
Dec 31 By Depreciation A/c
(M-I Rs. 10,000 + M-
30,000 II Rs. 5,000) 15,000
2012
Jan 1 15,000
By balance b/d

30,000 30,000

30,000

Dr. Depreciation A/c Cr.

Date Particulars J.F Rs. Date Particulars J.F Rs.

. .

2009 2009
Dec 31 To Provision for Dec 31 By Profit and loss A/c 5,000
Depreciation A/c 5,000

2010 5,000 2010 5,000

 Dec 31 To Provision for Dec 31 By Profit and loss A/c
Depreciation A/c 10,000
10,000
2011 2011
Dec 31 To Provision for 10,000 Dec 31 By Profit and loss A/c 10,000
Depreciation A/c
15,00 15,000
0

15,000 15,000

Sale of an Asset
(1) On the date of sale of an Asset
Cash / Bank A/c Dr.
To Asset A/c
(Being an Asset sold)
(2) If case of profit
Asset A/c Dr.
To Profit and Loss A/c
(Being profit on sale of an asset transferred to profit and Loss A/c)
(3) In case of loss
Profit and Loss A/c Dr.
To Asset A/c
(Being loss on sale of an asset transferred to profit and Loss A/c)
Illustration – 2. Rohan Ltd. purchased a Machinery on 1st May, 2009 for Rs. 60,000. On 1st July,
2010 it purchased another Machine for Rs. 20,000. On 31 st March, 2011 it sold off the first
machine purchased in 2009 for Rs. 39,000. Depreciation is provided at 20% on the original cost
each year. Accounts are closed each year on 31 st December. Show the Machinery account from
2009 to 2011.
Dr. Machinery A/c Cr.

Date Particulars J.F. Rs. Date Particulars J.F. Rs.

2009 2009
May 1 To Bank A/c (M-I) 60,000 Dec 31 By Depreciation A/c 8,000
Dec 31 By Balance c/d 52,000

2010 60,000 2010 60,000

Jan 1 To Balance b/d Dec 31 By Depreciation A/c
Jul 1 To Bank A/c(M-II) (M-I Rs. 12,000 +
52,000
Dec 31 M-II Rs. 2,000)
20,000 14,000
By Balance c/d
(M-I Rs. 40,000 +
58,000
2011 2011 M-II Rs. 18,000)
Jan 1 To Balance b/d Mar 31
Mar 31 To Bank A/c Mar 31
(M-III) 72,000 By Bank A/c (Sale) 72,000
Mar 31 To Profit and Loss Dec 31 By Depreciation
A/c (profit on sale) A/c(M-I)
58,000 By Depreciation A/c 39,000
50,000 Dec 31 (M-II Rs. 4,000 + 3,000
M-III Rs. 7,500)
 2,000 11,50
By Balance c/d 0
(M-II Rs. 14,000 +
2012 To balance b/d M-III Rs. 42,500)
Jan 1 56,500

1,10,000 1,10,000

56,500

Working notes:
Calculation of profit or loss on sale of machinery:
Book value as on 1st January, 2011 Rs. 40,000
Less: Depreciation (60,000*20/100*3/12) Rs. 3,000
Book value as on 31st March, 2011 Rs. 37,000
Less: sale of machinery Rs. 39,000
Profit on sale of machine Rs. 2,000

Illustration 3. Suyashi Ltd. purchased on 1st January, 2009 a machinery for Rs. 36,000 and spent Rs.
4,000 on its installation. On 1 st July, 2009 another machine purchased for Rs. 20,000. On 1 st July, 2011,
machine bought on 1st January, 2009 was sold for Rs. 12,000 and a new machine purchased for Rs.
64,000 on the same date. Depreciation is provided on 31 st December @ 10% p.a. on the written down
value method. Prepare machinery A/c from 2009 to 2011.

Solution:
Dr. Machinery A/c Cr.

Date Particulars J.F. Rs. Date Particulars J.F. Rs.

2009 2009
Jan 1 To Bank A/c (M-I) Dec 31 By Depreciation A/c
(36,000 + 4,000) 40,000 (M-I Rs. 4,000 + M- 5,000
July 1 To Bank A/c 20,000 Dec 31 II Rs. 1,000)
By Balance c/d 55,000
(M-I Rs. 36,000 +
M-II Rs. 19,000)

2010 60,000 2010 60,000

Jan 1 To Balance b/d Dec 31
55,000
By Depreciation A/c
5,500
Dec 31 (M-I Rs. 3,600 + M-
II Rs. 1,900)
49,500
2011 2011 By Balance c/d
Jan 1 To Balance b/d July 1 (M-I Rs. 32,400 +
July 1 To Bank A/c July 1 M-II Rs. 17,100)
(M-III) 55,000 55,000
July 1 By Bank A/c (Sale)
By Depreciation
49,500 Dec 31 A/c(M-I) 12,000
64,000 by Profit and Loss 1,620
 Dec 31 A/c (profit on sale)
By Depreciation A/c 18,780
(M-II Rs. 1,710 +
2012 M-III Rs. 3,200) 4,910
Jan 1 To balance b/d By Balance c/d
(M-II Rs. 15,390 + 76,190
M-III Rs. 60,800)

1,10,000 1,10,000

76,190

Working notes:
Calculation of Profit or loss on machine sold:
Book value of machine sold as on 31st December, 2010 Rs. 32,400
Less: Depreciation (32400*10/100*6/12) Rs. 1,620
Book value of machine sold as on 1st July, 2011 Rs. 30,780
Less: sale of machine Rs. 12,000
Loss on sale of machine Rs. 18,780

Disposal of an Asset:
Under this method a new account is opened named ‘Asset Disposal A/c’ at the time of sale of an asset.
Following journal entries required for preparation of Asset Disposal A/c

(a) When provision for depreciation A/c is maintained.

(1) Asset disposal A/c Dr.
To Asset A/c
(With the original cost of asset being sold)
(2) Provision for depreciation A/c Dr.
To Asset disposal A/c
(Transfer of accumulated depreciation)
(3) Bank A/c Dr.
To Asset disposal A/c
(With the net sales proceeds)
(4) Asset disposal A/c Dr.
To Profit and Loss A/c
(For profit on sale of the asset)
(5) Profit and Loss A/c Dr.
To Asset disposal A/c
(For loss on sale of an asset)
(b) When provision for depreciation A/c is not maintained
In this case replace entry no. 2 from above journal entries by passing following journal entry.
Depreciation A/c Dr.
To Asset disposal A/c

Illustration 4. On 1st April, 2008, Jasmeet Ltd. purchased a machine for Rs. 12,00,000. On 1 st October,
2010, a part of machine purchased on 1 st April, 2008 for Rs. 80,000 was sold for Rs. 45,000 and a new
machine was purchased for Rs. 1,58,000 on the same date. Company provides depreciation @10% p.a.
on written down value method. Prepare necessary ledger accounts
(a) When provision for depreciation A/c is not maintained.
(b) When provision for depreciation A/c is maintained.
Solution.
(a) When provision for depreciation A/c is not maintained.

Dr. Machinery A/c Cr.

Date Particulars J.F. Rs. Date Particulars J.F. Rs.

2008 2009
Apr 1 To Bank A/c 12,00,000 Mar 31 By Depreciation A/c 1,20,000
Mar 31 By Balance c/d 10,80,000

2009 12,00,000 2010 12,00,000

Apr 1 To Balance b/d Mar 31 By Depreciation A/c
Mar 31 By Balance c/d
10,80,000 1,08,000
2010 2010 9,72,000
Apr 1 To Balance b/d 10,80,000 Oct 1 By Bank A/c (Sale) 10,80,000
Oct 1 To Bank A/c Oct 1 By Profit and Loss
Oct 1 A/c (Loss on sale)
9,72,000 2011 By Depreciation A/c 45,000
1,58,000 Mar 31 16,560
Mar 31 By Depreciation A/c 3,240
By Balance c/d
2011 98,620
Apr 1 To balance b/d 9,66,580

11,30,000 11,30,000

9,66,580

(b) When provision for depreciation A/c is maintained.

Dr. Machinery A/c Cr.

Date Particulars J.F. Rs. Date Particulars J.F Rs.

.

2008 2009 12,00,

Apr 1 To Bank A/c 12,00,000 Mar 31 By Balance c/d 000

12,00,000 12,00,000
2009 2010
Apr 1 To Balance b/d Mar 31 By Balance c/d
12,00,00
12,00,000 0
2010 2010
Apr 1 To Balance b/d 12,00,000 Oct 1 By Machine Disposal 12,00,000
Oct 1 To Bank A/c A/c
2011
Mar 31 By Balance c/d
12,00,000 80,000
1,58,000
 2011 12,78,00
Apr 1 To balance b/d 0

13,58,000 13,58,000

12,78,000

Dr. Provision for Depreciation A/c Cr.

Date Particulars J.F. Rs. Date Particulars J.F. Rs.

2009 2009
Mar 31 To Balance c/d 1,20,000 Mar 31 By Depreciation A/c 1,20,000

2010 1,20,000 2009 1,20,000

Mar 31 To Balance c/d Apr 1 By Balance b/d
2010
2,28,000 1,20,000
Mar 31 By Depreciation A/c
1,08,000
2010 2011
Oct 1 To Machinery 2,28,000 Apr 1 By Balance b/d 2,28,000
disposal A/c (8,000 Oct 1 By Depreciation A/c
2011 + 7,200 + 3,240) 2011
Mar 31 Mar 31 By Depreciation A/c 2,28,000
To Balance c/d 18,440 3,240
2011
3,11,420 Apr 1 98,620
By Balance b/d
3,29,860 3,29,860

3,11,420

Dr. Machinery Disposal A/c Cr.

Date Particulars J.F. Rs. Date Particulars J.F. Rs.

 2010 2010
Oct 1 To Machinery A/c 80,000 Oct 1 By Provision for 18,440
Dep. A/c 4
Oct 1 By Bank a/c (sale) 5,000
Oct 1 By Profit and loss 16,
A/c (Loss on sale) 560

80,000 80,000

Working notes:
Calculation of profit or loss on machine sold
Cost as on 1st April, 2008 Rs. 80, 000
Less: dep. For 2008-09 Rs. 8,000
Book value as on 1stApril, 2009 Rs. 72,000
Less: dep. For 2009-10 Rs. 7,200
Book value as on 1stApril, 2010 Rs. 64,800
Less: dep. For 2010 (64,800*10/100*6/12) Rs. 3,240 (April to October)
Book value as on 1st October, 2010 Rs.61,560
Less: sale of machine Rs.45,000
Loss on sale of machine Rs.16,560

Calculation of depreciation on remaining machine

Old machine (9,72,000 – 64,800 = 9,07,200*10/100) Rs. 90,720
New machine (1,58,000*10/100*6/12) Rs. 7,900 (October to March)
Rs. 98,620