Depreciation - class-XI

The term 'Depletion' refers to the physical deterioration by the exhaustion of natural resources (ore-deposits in mines, oil wells, quarries, timber stands etc.)

Depreciation is the allocation of the cost of a tangible fixed asset over its useful life. It is not applied to current or liquid assets.

The double-declining balance method is a common accounting practice used in various jurisdictions, including India, to accelerate depreciation. While it is used globally, it is specifically recognized in Indian accounting standards and tax practices.

The expense is recognized and reported when the asset is placed into use and is calculated for each accounting period and reported under Accumulated Depreciation on the balance sheet and Depreciation Expense on the income statement. The amount reduces both the asset's value and the accounting period's income.

Depreciation and Depletion: In fact, the term 'depletion' is used in respect of the extraction of natural resources like quarries, and mines, that reduces the availability of quantity of the material or asset. Depreciation, as stated earlier, is a loss in value of an asset generally arising on account of wear and tear.

Wasting Assets are the asset that has a limited life and thus decreases in value (depreciates) over time.

The term depletion is used in the context of extraction of natural resources like mines, quarries, etc. that reduces the availability of the quantity of the material or asset.

Hence Depletion method depreciation is normally applied in case of wasting assets.

Depletion method of depreciation is most suitable for coal mine. This method is specially used for those assets which deplete with use. The cost of the asset is divided by total workable deposits. For example :

1.    Amortization is used for expiration of intangible assets.

Option D is the Correct one.

Depletion.

Depletion is an accounting and tax concept used most often in mining, timber, petroleum, or other similar industries. The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. Depletion is similar to depreciation in that it is a cost recovery system for accounting and tax reporting.

Depletion for both accounting purposes and united states tax purposes, is a method of recording the gradual expense or use of natural resources over time. Depletion is using up of natural resources by mining, drilling, or felling.

Amortization is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of time. 

Fixed Asset are those which provides benefits to the business in future years to come. Fixed Asset looses its value due to normal wear & tear and usage. Every year an amount is charged as depreciation on each of the fixed asset. 

Below are the three main factors which affect the calculation of depreciation:

Depreciation is the process of reduction in the value of asset. Depreciation is the permanent and continuous decrease in the book value of a depreciable fixed asset due to use, effluxion of time, obsolescence, expiration of legal rights or any other cause.

Depletion is similar to  depreciation in that it is a cost recovery system for accounting and tax reporting. Depletion is the exhaustion of natural resources as a result of their removal. examples are oil, minerals, and timber etc.

Depletion is an accounting technique used to allocate the cost of extracting natural resources such as mines, quarries, oil reserves, timber etc. 

The machinery is available for use from 1-10-2013,

An Intangible assets is an asset that is not physical in nature.  Amortization is an accounting term that refers to the process of allocating the cost of an intangible asset over the period of years. Copyrights are intangible assets as these are not physical in nature. It is a legal right of owner. So this amount can be written off under amortized method of depreciation. 

Under sinking fund method, depreciation charged is invested in outside securities at the end of the first year. Interest is earned during the second year and the first entry for investment of interest is made at the end of the year.  Amount of depreciation is calculated with the help of sinking fund tables and hence depreciation fund method is also known as sinking fund method.

Amortization can refer to the process of paying off debt over time in regular installments of interest and principal sufficient to repay the loan in full by its maturity date. With mortgage and auto loan payments, a higher percentage of the flat monthly payment goes toward interest early in the loan. With each subsequent payment, a greater percentage of the payment goes toward the loan's principal. 

Annuity method is particularly applicable to those assets whose cost is heavy and life is long and fixed, e.g. leasehold property, land and building etc.

Depreciation = opening value + purchase - sale - closing value 
                       = 80000 + 40000 - 20000 - 70000 

Accounting standards require consistency in depreciation methods to ensure financial comparability. A change is only permitted if it is required by law, mandated by a new accounting standard, or if the change provides a more accurate and fair representation of the financial position.

Option D is the Correct one.

Option C is the correct one.

In the Depreciation Fund method every year, the fund invests an amount of money equal to an existing asset's depreciation allowance in gilt-edged securities, giving the company money that can be used to buy new assets.

Leasehold property is often depreciated using the annuity method because it accounts for the interest cost of the capital invested in the lease over its term. This reflects the time value of money associated with the lease payment structure.

Option A is the correct one.

The annual charge to profit and loss account/income statement for depreciation(it’s charge against profit) is based upon an estimate of how much of the overall economic usefulness of a fixed asset has been used up in that accounting period.

Option C is the correct one.

Revaluation method of depreciation. The value of the asset on
which depreciation charge is to be calculated is assessed both at the
start and at the end of the year and any revaluation losses arising
during the year are considered as the depreciation charge.

The annuity method is ideal for assets requiring significant initial capital investment where the asset is expected to remain in use without major additions, as it treats the asset as an investment that earns a return.

By using an asset, one loses not only the money spent on acquiring it but also the interest which would have been earned on the money. Therefore, depreciation should cover not only the cost of the asset but also an appropriate amount for interest. This is done in annuity method. Interest is calculated on the book value of the asset at the proper  rate and debited to asset. The amount is credited to interest account, which then goes to the credit side of the profit and loss account.

The sum-of-the-years-digits method is an accelerated depreciation method. It applies a decreasing fraction to the depreciable base, resulting in higher depreciation charges in early years and lower charges in later years.

Option C is the correct one.

The asset is then credited with a fixed amount of depreciation for each successive year. The annuity method assumes that the sum spent on buying an asset is an investment that should be expected to yield interest.

Option A is the correct one.

The annuity method assumes that the sum spent on buying an asset is an investment that should be expected to yield interest. As such, the interest is charged on the diminishing balance of the asset.

The purpose of depreciation is to achieve the matching principle of accounting. That is, a company is attempting to match the historical cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset.

Since it is difficult to precisely match a productive asset's cost to a company's revenues, the asset's cost is usually allocated to the years in which the asset is used. In other words, depreciation systematically moves the asset's cost from the balance sheet to depreciation expense on the income statement over the asset's useful life. Accountants point out that depreciation is an allocation process which does not result in reporting the asset's market value.

Depreciation serves two main purposes: it allocates the cost of a tangible asset over its useful life (matching principle) and it ensures that the capital invested in the asset is systematically recovered.

The depletion method is specifically used for wasting assets, such as mines, oil wells, and quarries, where the asset is physically consumed or extracted over time.

Land is not a depreciable asset because it has an indefinite useful life. Furniture and machinery are tangible assets that wear out or become obsolete, making them subject to depreciation.

Amortization, depletion, and depreciation are all methods of allocating the cost of an asset over its life. Capitalization is the process of recording an expenditure as an asset rather than an expense.

Option D is correct. Under this method, depreciation is charged on the basis of output extracted in comparison with the estimated total contents of mines. Steps are : -
1) Total contents of the assets are first estimated in terms of tons, gallons etc. 

Depreciation is the difference between the opening balance plus additions and the closing balance. (8000 + 5000) - 10500 = 2500.

Under the units of production method, depreciation = (Cost / Total Units) * Units in year. Total units = 15000 + 20000 + 25000 = 60000. Third year depreciation = (50000 / 60000) * 25000 = 20833.33.

The sum-of-the-years-digits method provides higher depreciation in the early years and lower in the later years, which classifies it as a declining charge method.

In the annuity method, the asset is treated as an investment. Interest is calculated on the book value of the asset at the beginning of each year to determine the annual charge.

When the depreciation fund (or sinking fund) is used to replace an asset, the accumulated balance in the fund is transferred to the asset account to write off the old asset's cost.

Changing a depreciation method is a change in accounting estimate or policy. It requires disclosure in the financial statements, often through an explanatory paragraph, to maintain transparency regarding the change in consistency.

The depletion method calculation is based on the extraction quantity. 200 tons * 10 (rate) = 2000.

When changing a depreciation method, one should not calculate the value of the asset by the old method on the date of change as if the new method never existed; instead, the change is usually applied prospectively or retrospectively depending on the standard.

The sinking fund method involves setting aside cash into a fund that earns interest, which is why it is synonymous with the depreciation fund method.

The depreciation fund method is commonly referred to as the sinking fund method because the annual amounts set aside are invested to accumulate interest until the asset is replaced.

The depletion method is specifically designed for natural resources where the asset is physically exhausted through extraction.

Depreciation of property :- It is calculated as the 'factor' product of the total value of the property with the age of construction. The depreciation factor remains valid only for the concrete structures and not land.

The land asset is not depreciated, because it is considered to have an infinite useful life. 

Amortization of intangibles is the process of expensing the cost of an intangible asset over the projected life of the asset. Intangible assets, such as patents and trademarks, are amortized into an expense account. Tangible assets are posted to expenses through depreciation.

Depreciation is not a sudden loss (it is gradual), not an appropriation of profit (it is a charge against profit), and it is not a valuation method (it is a cost allocation method).

Depreciation is thus the decrease in the value of assets and the method used to reallocate, or "write down" the cost of a tangible asset (such as equipment) over its useful life span.

Insurance Policy Method  In this method, instead of purchasing securities, an insurance policy is purchased for an amount equal to the cost of replacement of asset.

Secret reserve helps in eliminating unhealthy competition by not showing true profit to the competitors.  

    (I)  Prorating cost of an “Intangible Asset” over the period during which benefits of this asset are estimated to last is called Amortization. The concept of amortization is also used with leases & debt repayment. Amortization is for Intangible assets  Depletion is for natural resources such as timber and oil.  Depreciation = related to tangible assets, e.g. property, plant and equipment.

All the statements provided (A, B, and C) are correct definitions or principles of depreciation. Therefore, 'None of the above' is the correct choice.

Diminishing Balance Method of Calculating Depreciation :- Under this method, the amount of depreciation is calculated as a fixed percentage of the reducing or diminishing value of the asset standing in the books at the beginning of the year, so as to bring down the book value of the asset to its residual value.

Double-Declining Balance, revenues and assets will be reduced more due to the higher depreciation expense. In later years, a lower depreciation expense can have a minimal impact on revenues and assets. However, revenues may be impacted by higher costs related to asset maintenance and repairs.

   Amortization is the process of incrementally charging the cost of an asset to with charging intangible assets to expense over time, and depreciation is Similarly, depletion is associated with charging the cost of natural .

Depletion is a periodic charge to expense for the use of natural resources. Thus, it is used in situations where a company has recorded an asset for such items as oil reserves, coal deposits, or gravel pits. Compute a depletion base. Compute a unit depletion rate.

As per sum of year digit method of depreciation,

Useful life = 5 years

Cost = Rs 6,00,000

the digits in the years of the asset's useful life are summed: 1 + 2 + 3 + 4 + 5 = 15.

Calculation of amount of depreciation during the year 2014-2015 is

=1/15 x 600000

= 40,000

Depreciation written off is an expense and the amount written off will be deducted from the asset and the same will be decreased from owners equity. It is an expense and hence will be debited to the profit and loss account which will eventually reduce owner's equity.

Depreciation is the process of systematic allocation of the depreciable amount of an asset over it's useful life.

Earlier as per Companies Act 1956 schedule XIV was applicable, but with the introduction of Company’s Act 2013, method for calculating depreciation has changed from schedule XIV to schedule II.

The practice of reducing the value of assets to reflect their reduced worth over time. The term means the same as depreciation, though in practice amortisation tends to be used for the write-off of intangible assets, such as goodwill, while either term is used for the write-off of fixed capital.

Fixed Assets are classified as tangible assets and intangible assets. Tangible assets are those which can be touched, felt but intangible assets are those which can not be seen, touched or felt.

Amortisation is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of time. It also refers to the repayment of loan principle over time.

Amortisation is most commonly used for the gradual write-down of the cost of those intangible assets that have a specific useful life. Examples of intangible assets are patents, copyrights, trademarks, goodwill etc.

Depletion is similar to  depreciation in that it is a cost recovery system for accounting and tax reporting. Depletion is the exhaustion of natural resources as a result of their removal. examples are oil, minerals, and timber etc.

Annuity factor = 0.230975

Sinking fund table shows the factor = 0.23549

Depletion is a periodic charge to expense for the use of natural resources. Thus, it is used in situations where a company has recorded an asset for such items as oil reserves, coal deposits, or gravel pits etc. For plant and machinery depletion method is not used.

Annuity factor = 0.230975 (Taken from table)

Option C is correct.
Sum of years = 1+2+3+4 = 10
Original Cost = 1,00,000
Salvage Value = 10,000

                          = 90,000
Depreciation = 90,000*4/10
                       = 36,000.

Depreciation in the first year will be 36000.