Accounting Standard 6: Depreciation Accounting

Accounting Standard 6: Depreciation Accounting mandatory for all entities.

“Depreciation is Systematic allocation of depreciable value of depreciable asset written off over useful life of asset, irrespective of actual use, using appropriate method”.

Now let analyse the above definition.

Meaning of depreciable asset:-

Are those assets which have limited life but life is more than one year and asset is used in production of goods/services, Administration use or Rental.

Meaning of Depreciable value:-

                Depreciation is always calculated in such manner that its sum total is equal; to depreciable value.

                Depreciable Value = Cost Price – Estimated Scrap value

Systematic Allocation:- Systematic Allocation means any method of charging depreciation which gives systematic expenses on asset. There are two methods of systematic allocation.

           ·         Straight Line Method

           ·         Written down value method

“Generally entities apply WDV for plant and machinery and furniture and SLM for Building”

                Depreciation as per SLM   =   (Cost price – Scrap value)/useful life

            Depreciation as per  WDV  =  1- (scrap value/cost price)^1/life
Useful Life of an asset:- It means that part of economic life for which the asset could be used in the firm. Useful life is estimated by the management by considering the following.

            ·         Change in technology

            ·         Wear and tear

            ·         Applicable laws

      Method of depreciation can be changed from WDV to SLM or vice versa if required. If method is changed it is called change in accounting policy and hence should be disclosed and changed RETROSPECTIVELY.

Following disclosures should be made:

          ·         Old Policy

          ·         New Policy

          ·         Reason of Change

          ·         Effect of Change

Reasons can be the following:

          ·         Better Presentation

          ·         Compliance with law

          ·         Compliance with Accounting Standard

Whenever life of asset or scrap value is change it is done in PROSPECTIVE basis. It means that the past depreciation remains unaltered. Whenever assets are revalued the depreciation is calculated on the revalued amount.

“This AS is not applicable in the case assets generated from nature”.

Such As:

·         Mines

·         Oil and Minerals

·         Live Stock

·         Water energy etc

·         Land