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Contents 1 What is Depreciation ? 2 Overview of the articles 3 Accounting 4 Recording depreciation 5 Methods of depreciation 6 Taxes 7 References 8 External links

What is Depreciation ?

In accounting, depreciation is a term used to describe any method of attributing the historical or purchase cost of an asset across its useful life, roughly corresponding to normal wear and tear.

Overview of the articles

• Taxation in India
  • Income tax in India
    • Permanent account number for Income tax in India
    • Income tax in India for Individuals
    • Income tax in India for Partnership Firms
    • Income tax in India for Corporates
    • Income tax in India for Hindu Undivided Families _ HUFs
    • TDS Tax Deducted at Source Indian Income Tax
    • My eTax Profile.
    • Capital Account
    • Depreciation
      • Depreciation in India
    • Advance Income tax in India
    • Guide to filing tax returns
    • Income Tax FAQs
• Accounting using eDeskOnline
• Prepare for your Taxation on eDeskOnline

Accounting

A company needs to report depreciation accurately in its financial statements in order to achieve two main objectives.

• First, to match its expenses with the income generated by means of those expenses.
• Second, to ensure that the asset values in the balance sheet are not overstated. An asset acquired in Year 1 is unlikely to be worth the same amount in Year 5.

Depreciation is an estimated or expected view of the decline in value of an asset. For example, an entity may depreciate its equipment by 15% per year. This rate should be reasonable in aggregate (such as when a manufacturing company is looking at all of its machinery), and consistently employed. However, there is no expectation that each individual item declines in value by the same amount, primarily because the recognition of depreciation is based upon the allocation of historical costs and not current market prices.

Recording depreciation

For historical cost purposes, assets are recorded on the balance sheet at their original cost; this is called the historical cost. Historical cost minus all depreciation expenses recognized on the asset since purchase is called the carrying value|book value. Depreciation is not taken out of these assets directly. It is instead recorded in a contra asset account: an asset account with a normal credit balance, typically called "accumulated depreciation". Balancing an asset account with its corresponding accumulated depreciation account will result in the net book value. The net book value will never fall below the salvage value, meaning that once an asset is fully depreciated, no further expenses will be taken during its life. Salvage value is the estimated value of the asset at the end of its useful life. In this way, total depreciation for an asset will never exceed the estimated total cash outlay (depreciable basis) for the asset. The exception to this is in many price-regulated industries (public utilities) where salvage is estimated net of the cost of physically removing the asset from service. If the expected cost of removal exceeds the expected raw (or gross) salvage, then the net of the two (called Net Salvage) may be negative. In this case, the depreciation recorded on the regulated books may exceed the depreciable basis. Companies have no obligation to dispose of depreciated assets, of course, and many depreciated assets continue to generate income.

Recording a depreciation expense will involve a credit to an accumulated depreciation account. The corresponding debit will involve either an expense account or an asset account which represents a future expense, such as work in process. Depreciation is recorded as an adjusting journal entry.

A write-down is a form of depreciation that involves a partial write off. Part of the value of the asset is removed from the balance sheet. The reason may be that the book value (accounted value) of the fixed asset has diverged from the market value and causes the company a loss. An example of this would be a revaluation of goodwill on an acquisition that went bad.

Methods of depreciation

There are several methods for calculating depreciation, generally based on either the passage of time or the level of activity (or use) of the asset.

• Straight-line depreciation
• Sinking fund method
• Declining-balance / Reducing balance depreciation
• Activity depreciation
• Sum of years digits depreciation
• Units of Production depreciation
• Units of time depreciation

Taxes

When a company spends money for a service or anything else that is short-lived, this expenditure is usually immediately tax deduction|tax deductible, and the company enjoys an immediate tax benefit.^[1]

References

• Rate of Depreciation of a Car

External links

• Depreciation Accelerated depreciation, book vs. tax depreciation, use of estimates, journal entries...
• Fixed Asset Info Automatic depreciation calculator, tax and other accounting links, depreciation classes, and more...
• Beginner's Guide to Financial Statements