Depreciation -Meaning, objectives,Merits,Demerits

 MEANING OF DEPRECIATION 

Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. In other words, it is a way of spreading out the expense of an asset over the time that it is expected to be used. This is done because assets do not typically last forever, and their value decreases over time due to wear and tear, obsolescence, or other factors.

Depreciation is not a physical decline in the asset itself; it is simply an accounting entry that reduces the asset's book value. The book value is the asset's original cost minus the accumulated depreciation. This means that the asset will be reported on the company's balance sheet at a lower value each year, which will also reduce the company's net income.

There are several different methods of depreciation, but the most common is straight-line depreciation. Under straight-line depreciation, the asset's cost is evenly spread out over its useful life. For example, if an asset costs $1,000 and is expected to last for five years, then the annual depreciation expense would be $200.

Depreciation is an important concept for businesses because it affects their financial statements and their tax liability. By depreciating assets, businesses can match the expense of the asset to the revenue that it generates. This can help to smooth out earnings fluctuations and make the company's financial statements more accurate. Additionally, businesses are allowed to deduct depreciation on their tax returns, which can lower their taxable income and their tax liability.

Here are some examples of assets that are typically depreciated:

• Equipment: This includes machinery, tools, and other items that are used in production.

• Vehicles: This includes cars, trucks, and other vehicles that are used for business purposes.

• Buildings: This includes office buildings, factories, and other structures that are used for business purposes.

• Furniture and fixtures: This includes desks, chairs, and other items that are used in offices or other business premises.

Depreciation is a complex topic, and there are many factors to consider when calculating depreciation expense. Businesses should consult with a qualified accountant to ensure that they are depreciating their assets correctly.

CASUES OF DEPRECIATION 

Depreciation is the decrease in the value of an asset over time. It is caused by a number of factors, including:

• **Physical deterioration:** This is the most common cause of depreciation. Over time, all assets will wear out and become less valuable. This is due to regular use, exposure to the elements, and accidents.

• **Obsolescence:** This occurs when an asset becomes outdated or worthless due to technological advancements. For example, a computer that was state-of-the-art a few years ago may now be obsolete and worth very little.

• **Changes in demand:** If the demand for an asset decreases, its value will also decrease. For example, the value of a factory that produces a product that is no longer in demand will decrease.

• **Changes in technology:** New technologies can make old assets obsolete. For example, the development of digital photography has made film cameras obsolete.

• **Legal or other factors:** These factors can include changes in laws, regulations, or accounting standards. For example, a change in the way that depreciation is calculated can affect the value of an asset.

Depreciation is a non-cash expense, which means that it does not involve the actual spending of cash. However, it is still an important expense because it reduces the value of an asset and can affect the profitability of a business.

Here are some examples of how depreciation can affect a business:

• **Depreciation can reduce taxable income.** When a business depreciates an asset, it reduces the amount of taxable income it reports. This is because depreciation is an expense that is allowed to be deducted from taxable income.

• **Depreciation can reduce cash flow.** While depreciation is a non-cash expense, it can still affect cash flow. This is because businesses often use depreciation to finance the purchase of new assets. When a business depreciates an asset, it is essentially creating a reserve of cash that can be used to purchase a new asset.

• **Depreciation can affect the value of a business.** Depreciation can affect the value of a business by reducing the value of its assets. This can make it more difficult for a business to obtain financing or sell its assets.

Overall, depreciation is an important concept that businesses need to understand. By understanding the causes of depreciation, businesses can better manage their assets and make informed decisions about their finances.

Depreciation is an accounting method that allocates the cost of a tangible asset over its useful life. This means that a portion of the asset's cost is expensed each year, even though the asset may still be in use. This is done to reflect the fact that the asset will eventually wear out or become obsolete and will need to be replaced.

OBJECTIVES OF DEPRECIATION 

There are several objectives of depreciation:

* **To match the cost of an asset with the revenue it generates.** This is known as the matching principle. For example, if a company buys a machine for $10,000 and expects to use it for five years, it will depreciate the machine by $2,000 per year. This means that the company will expense $2,000 of the machine's cost each year, even though the machine is still in use. This will help to ensure that the company's financial statements accurately reflect the cost of the machine and the revenue it generates.

* **To provide a fund for the replacement of assets.** This is because depreciation expense creates a reserve that can be used to purchase new assets when the old ones wear out or become obsolete.

* **To report the asset's value on the balance sheet at its fair market value.** This is because depreciation expense reduces the book value of the asset, which is the amount at which it is reported on the balance sheet. The book value of an asset should be equal to its fair market value, which is the price at which it could be sold in an open market.

* **To calculate the cost of goods sold.** This is because depreciation expense is a component of the cost of goods sold. This means that depreciation expense is included in the calculation of the cost of goods sold, which is the amount of expense that a company incurs to produce the goods that it sells.

Depreciation is an important concept in accounting because it helps to ensure that financial statements accurately reflect the economic reality of a business. By matching the cost of an asset with the revenue it generates, providing a fund for the replacement of assets, reporting the asset's value on the balance sheet at its fair market value, and calculating the cost of goods sold, depreciation helps to ensure that financial statements are accurate and reliable.

 FACTORS AFFECTING THE DEPRECIATION

Depreciation is the allocation of the cost of an asset over its useful life. It is a non-cash expense that reduces the book value of an asset on the balance sheet. There are three main factors that affect the amount of depreciation:

Cost: The cost of an asset is the initial purchase price plus any additional costs incurred to get the asset ready for use. For example, the cost of a computer would include the purchase price, software installation, and training costs.

Salvage value: The salvage value is the estimated amount that an asset can be sold for at the end of its useful life. It is typically a small percentage of the original cost of the asset. For example, the salvage value of a computer might be $100.

Useful life: The useful life is the number of years that an asset is expected to be used. It is based on factors such as the type of asset, its expected usage, and technological advancements. For example, the useful life of a computer might be 5 years.

The amount of depreciation is calculated using a variety of methods, the most common of which are straight-line depreciation, declining balance depreciation, and sum-of-the-years' digits depreciation

In addition to these three main factors, there are a number of other factors that can affect depreciation, such as:

Obsolescence: Obsolescence is the rapid decline in the value of an asset due to technological advancements. For example, a computer that is only a few years old may be considered obsolete if newer, more powerful computers are available.

Physical wear and tear: Physical wear and tear is the damage to an asset that occurs over time due to use. For example, a car will depreciate faster if it is driven more frequently.

Repairs and maintenance: Repairs and maintenance are the costs of keeping an asset in working condition. Higher repair and maintenance costs can lead to higher depreciation.

Economic conditions: Economic conditions can also affect depreciation. For example, if the economy is in a recession, businesses may sell assets at a loss, which can lower the salvage value of assets and increase depreciation.

METHOD OF CHARGING DEPRECIATION 

 let's discuss the method of charging depreciation in India point-wise with examples:

1. **Straight Line Method (SLM):**

   - Depreciation is charged evenly over the useful life.

   - Example: If a company purchases machinery for ₹100,000 with a residual value of ₹10,000 and an estimated useful life of 5 years, the annual depreciation using SLM would be \((₹100,000 - ₹10,000) / 5 = ₹18,000\).

2. **Written Down Value Method (WDV):**

   - Depreciation is applied at a fixed percentage on the diminishing book value.

   - Example: If the same machinery is depreciated at 20% WDV, the depreciation in the first year would be ₹100,000 * 20% = ₹20,000. In the second year, it would be applied to the reduced book value (₹100,000 - ₹20,000).

3. **Componentization:**

   - Assets with significant parts having different useful lives are accounted for separately.

   - Example: A building with both structural and non-structural components might have different depreciation rates for each component based on their respective useful lives.

4. **Impairment Testing:**

   - Regular assessments to determine if the carrying amount exceeds the recoverable amount.

   - Example: If the machinery's carrying amount is ₹80,000, but its recoverable amount is assessed to be ₹75,000, an impairment loss of ₹5,000 would be recognized.

5. **Useful Life and Residual Value:**

   - Companies need to assess and disclose estimated useful life and residual value.

   - Example: An entity estimates the useful life of a computer at 3 years with no residual value, depreciating it evenly over this period.

6. **Disclosure Requirements:**

   - Detailed disclosure of accounting policies and the carrying amount of each class of property, plant, and equipment in the financial statements.

These practices align with Indian Accounting Standards (Ind AS 16) and help companies provide accurate and transparent financial information.

MERITS AND DEMERITS OF STRAIGHT LINE METHOD 

**Straight Line Method:**

**Merits:**

1. **Simplicity:** Straight Line Depreciation is straightforward and easy to understand, making it accessible for businesses with minimal accounting expertise.

2. **Uniform Allocation:** Provides a consistent depreciation expense over the asset's useful life, making budgeting and financial planning more predictable.

3. **Ideal for Linear Usage:** Suitable for assets that experience a uniform reduction in value over time, such as vehicles or machinery.

4. **Asset Value Estimation:** The method helps in estimating the remaining book value of an asset at any point during its useful life.

**Demerits:**

1. **Assumption of Constant Usage:** Assumes that the asset's utility declines at a constant rate, which may not always reflect the actual pattern of depreciation.

2. **Market Value Ignored:** Ignores changes in the market value of the asset, which can lead to disparities between book value and market value.

3. **Inaccuracy for Some Assets:** Not suitable for assets that have a rapid loss in value early in their life or experience significant obsolescence.

4. **Inflexibility:** Once the depreciation rate is set, it remains constant, regardless of external factors influencing an asset's value.

Remember that the choice between depreciation methods depends on the nature of the asset and the financial reporting requirements of

step-by-step guide on how to prepare a Profit & Loss Appropriation Account :

 step-by-step guide on how to prepare a Profit & Loss Appropriation Account in a partnership business:

! Here's a step-by-step guide on how to prepare a Profit & Loss Appropriation Account in a partnership business:

1. **Calculate Net Profit:**

   - Begin by calculating the net profit of the partnership business. This is done by deducting all expenses, including operating costs and taxes, from the total revenue.

2. **Allocate Salary and Interest:**

   - Allocate salaries and interest on capital to the partners. These are predetermined amounts agreed upon in the partnership deed.

3. **Adjustments for Partners’ Capital Accounts:**

   - Make adjustments for any changes in the partners' capital accounts during the accounting period. This includes additional investments, withdrawals, and any interest on drawings.

4. **Share of Profits or Losses:**

   - Determine the profit-sharing ratio among the partners. This is usually based on the partnership agreement. Allocate the net profit or losses according to this ratio.

5. **Special Appropriations:**

   - If there are any special appropriations, such as bonuses or specific shares of profit for particular partners, allocate these amounts accordingly.

6. **Reserves and Retained Earnings:**

   - Decide whether to retain a portion of the profits as reserves or distribute the entire amount. Adjust the appropriation account accordingly.

7. **Taxation:**

   - Account for any income tax on the profits. Deduct the tax amount from the total profits before making final allocations.

8. **Prepare the Profit & Loss Appropriation Account:**

   - Create a format for the Profit & Loss Appropriation Account. List all the components such as salaries, interest, profit-sharing, special appropriations, and taxes. Show the final distributable profit.

9. **Distribution of Profits:**

   - Distribute the profits among the partners as per the agreed terms. This may involve transferring amounts to their capital accounts or providing for cash withdrawals.

10. **Closing Entries:**

    - Make closing entries to transfer the net profit or loss to the partners' capital accounts. This ensures that the books are balanced for the next accounting period.

Remember to follow the partnership agreement closely, as it dictates how profits and losses are to be distributed among the partners. Additionally, clear documentation is crucial for transparency and accountability in partnership accounting.

Business studies Questions with answers

 Differences between Time study and motion study.

Ans)Time study and motion study are both techniques used to improve the efficiency of work processes. However, there are some key differences between the two.

Time study is concerned with measuring the amount of time it takes to complete a specific task. This information can then be used to set realistic production standards and to identify areas where work processes can be streamlined.

Motion study, on the other hand, is concerned with breaking down a task into its smallest components and analyzing each component to identify movements that can be eliminated or simplified. This information can then be used to develop more efficient work methods.

Here is a table summarizing the key differences between time study and motion study:

Feature	Time study	Motion study
Focus	Time	Movement
Goal	Set production standards	Identify and eliminate inefficient movements
Output	Time estimates	Motion sequences

Q)What is meant by liberalization?  Write two programs of liberalization of India.

Ans.Liberalization is the process of reducing government intervention in the economy. This can be done by removing restrictions on trade and investment, or by privatizing state-owned enterprises. Liberalization is often associated with economic growth, as it can lead to increased competition and innovation.

Two programs of liberalization of India:

• Industrial de-licensing: This policy, introduced in 1991, removed the need for government approval to set up new industries.

• Trade liberalization: This policy, also introduced in 1991, reduced tariffs and other barriers to trade.

Q)Write the characteristics of functional organization.

       Ans)   Characteristics of functional               organisation:

• Departments are organized by function: This means that employees with similar skills and expertise are grouped together.

• There is a clear hierarchy: Top managers oversee the work of lower-level managers, who in turn oversee the work of employees.

• Communication is mostly top-down: Information and instructions flow from managers to employees.

• There is a focus on efficiency: The goal is to streamline work processes and reduce costs.

Q)What are effects on admission of a new partner in partnership business

 Q)What are effects on admission of a new partner in partnership business 

Ans.The admission of a new partner in a partnership business can have several effects:

1)Capital Infusion: A new partner often brings additional capital to the business, potentially increasing its financial strength and capacity for growth.

2)Dilution of Ownership: Existing partners may experience a dilution of their ownership percentage as the new partner's share is introduced.

3)Increased Expertise: The entry of a new partner can bring new skills, expertise, and perspectives to the business, contributing to its overall capabilities.

4)Shared Responsibilities: With a new partner, the workload and responsibilities may be distributed differently among the partners, impacting decision-making and daily operations.

5)Profit Sharing: The introduction of a new partner necessitates a reevaluation of profit-sharing arrangements, potentially affecting how profits and losses are distributed among partners.

6)Changes in Decision-Making: Decision-making processes may evolve, with the inclusion of the new partner in key strategic choices for the business.

7)Legal and Contractual Adjustments: The partnership agreement may need to be updated to reflect the changes brought about by the new partner, including alterations to roles, responsibilities, and profit-sharing arrangements.

 8)Potential Challenges: Differences in management style, business philosophy, or personal dynamics could pose challenges that need to be addressed for effective collaboration.

It's crucial for partners to communicate openly, update legal agreements, and conduct a thorough assessment of the financial and operational implications before admitting a new partner to mitigate potential risks and ensure a smooth transition.

NPO Question with ANSWER (Accountancy)

 

Non-Profit Income Accounts

Q)Which organisation are 

prepare Income and expenditure Account

Ans.Income and expenditure accounts are typically prepared by non-profit organizations such as charities, clubs, or societies. These organizations use this type of account to summarize their revenues and expenses over a specific period, providing a snapshot of their financial activities. Unlike profit-oriented businesses, non-profits aim to achieve their missions rather than generate profits for shareholders.

Q)Why income and expenditure Account is prepared?

Ans.An Income and Expenditure Account is prepared by non-profit organizations to track and report their financial activities. Here are the main reasons for preparing this type of account:

Financial Reporting: It provides a summary of the organization's revenues and expenses over a specific period, usually a fiscal year. This allows stakeholders, such as members, donors, and regulatory authorities, to understand how funds are utilized.

Transparency: Non-profit organizations often have a duty to be transparent about their financial dealings. The Income and Expenditure Account helps demonstrate how resources are allocated to various activities and programs.

Budgeting: It assists in budgetary planning for future periods by analyzing past income and expenditure patterns. This can aid in making informed financial decisions and setting realistic financial goals.

Compliance: Many non-profits are required by law or regulation to submit financial reports. An Income and Expenditure Account can serve as a key component of these reports, ensuring compliance with legal and regulatory requirements.

Decision-Making: The account provides a financial snapshot that can be used by the organization's leadership to make informed decisions about resource allocation, fundraising strategies, and operational priorities.

In summary, the Income and Expenditure Account is a crucial financial tool for non-profit organizations, helping them manage their finances, communicate their financial health to stakeholders, and fulfill legal and regulatory obligations.

Q)Features of income and expenditure Account

Ans.The Income and Expenditure Account for non-profit organizations typically exhibits the following features:

Non-Profit Focus: It is specifically designed for organizations that do not aim to make a profit but rather exist for charitable, educational, or other non-profit purposes.

Revenue Recognition: It includes all the organization's income and donations received during a specific period. This can include membership fees, grants, donations, and other sources of funds.

Expense Tracking: It outlines all expenditures incurred by the organization in fulfilling its mission. This can include program expenses, administrative costs, and fundraising expenses.

Accrual Basis: It often follows the accrual basis of accounting, recognizing revenues and expenses when they are earned or incurred, regardless of when the cash is received or paid.

Fund Accounting: Non-profits often use fund accounting to track resources for specific purposes or programs. The Income and Expenditure Account may present information on different funds within the organization.

No Profit or Loss: Unlike a profit and loss statement in a for-profit business, the Income and Expenditure Account does not show profit or loss but rather the surplus or deficit of revenues over expenses. Any surplus is typically reinvested in the organization's mission. In

Disclosure of Financial Health: It provides a clear picture of the organization's financial health, showing whether it is operating within its means and sustaining its activities.

Periodic Reporting: It is usually prepared for a specific period, often annually, to provide stakeholders with a snapshot of the organization's financial performance over that time frame.

Transparency: The account is a tool for transparency, helping the organization communicate its financial activities to members, donors, regulators, and the public.

Compliance: It may need to adhere to specific accounting standards or regulatory requirements applicable to non-profit organizations.

These features collectively make the Income and Expenditure Account a vital financial statement for non-profit organizations, serving both internal management and external stakeholders.

accounting treatment for profit arising from the re-allotment of shares

 

The accounting treatment for profit arising from the re-allotment of shares

The accounting treatment for profit arising from the re-allotment of shares:

When a company re-allots shares, any excess received over the nominal value of the shares represents a profit.

Recording the Transaction:

The initial receipt of funds from the re-allotment is recorded as a debit to the bank or cash account.

Separation of Nominal Value:

The nominal value of the re-allotted shares is separated from the total funds received. The nominal value is credited to the share capital account.

Treatment of Share Premium:

The excess over the nominal value is considered a premium. This premium is credited to the share premium account.

Share Premium Account:

The share premium account is part of shareholders' equity. It reflects the additional value received from shareholders beyond the nominal value of the shares.

Impact on Financial Statements:

The profit from the re-allotment affects the company's financial statements. It doesn't impact the income statement as it's a capital transaction.

Disclosure:

Adequate disclosure is essential in the financial statements to inform stakeholders about the nature and amount of profits arising from the re-allotment of shares.

Legal Compliance:

Ensure compliance with local accounting regulations and company law regarding the treatment of share re-allotment profits.

Use of Funds:

The funds generated from the re-allotment can be used for various purposes, such as retiring debt, financing projects, or distributing dividends, depending on the company's strategy.

Accounting language

 1)Debit: In accounting, "debit" refers to the left side of an account. It increases assets and expenses while decreasing liabilities and income. For example, if you debit cash, it means you are increasing the amount of cash in an account.

 2)Credit: On the other hand, "credit" is the right side of an account. It increases liabilities and income while decreasing assets and expenses. For instance, if you credit a revenue account, you're recording an increase in income.

Ledger Folio: A ledger folio is a reference number indicating the page in the ledger where a particular transaction is recorded. It helps in quickly locating entries. For example, "LF: 102" means the entry is on page 102 of the ledger.

Journal Folio: Similar to ledger folio, a journal folio is a reference to the page number in the journal where a transaction is recorded. It aids in tracing entries back to the journal. For instance, "JF: 45" means the transaction is on page 45 of the journal.

B/d (Balance brought down): B/d is used to denote the balance brought down from the previous accounting period to the current one. It's often found at the beginning of a ledger account. For example, "B/d: ₹5,000" signifies a balance of ₹5,000 brought down.

C/d (Balance carried down): C/d represents the balance carried down from the current accounting period to the next one. It's usually placed at the end of a ledger account. If the B/d was ₹5,000, the C/d would also be ₹5,000 if there are no changes in the account during the period.

@: The "@" symbol in accounting is used to denote "at." For example, "10 units @ ₹20" indicates that there are 10 units being sold at a rate of ₹20 each.

b/f (Brought forward): Similar to B/d, b/f stands for brought forward. It signifies the transfer of balances from one page or section to the beginning of the next. For instance, "b/f: ₹ 3,000" means a balance of ₹3,000 brought forward.

c/f (Carried forward): Like C/d, c/f represents carried forward. It indicates the transfer of balances from the end of one page or period to the beginning of the next. If the b/f was ₹3,000 and there are no changes, the c/f would also be ₹3,000.

Contra:

In accounting, "contra" refers to an account that is opposite in nature to another account. For example, a contra asset account, like "Accumulated Depreciation," has a credit balance (opposite to the normal debit balance of assets) and is used to reduce the carrying amount of an asset. Similarly, a contra liability account, like "Discount on Bonds Payable," has a debit balance (opposite to the normal credit balance of liabilities) and is used to reduce the carrying amount of a liability. Contra accounts are employed to provide a more accurate presentation of financial information.

11) **Profit:** Profit is the positive financial gain a business or individual receives from their activities, indicating that the income exceeds the expenses. It is a key measure of financial success and is calculated by deducting expenses from revenue.

12) **Loss:** Loss, on the other hand, is the negative financial result that occurs when expenses exceed revenue. It represents a decrease in the net worth of a business or individual. Calculated by deducting revenue from expenses, losses are essential to understanding financial performance.

13) **Surplus:** Surplus is the excess of revenue over expenses, similar to profit. However, surplus is often used in the context of non-profit organizations or government entities where the goal is not to make a profit but to have excess funds for future use or expansion of services.

14) **Deficit:** Deficit is the opposite of surplus, indicating that expenses exceed revenue. It results in a negative financial position. Deficits may prompt organizations to seek additional funding or make adjustments to their financial strategies.

15) **Depreciation:** Depreciation is an accounting method used to allocate the cost of tangible assets (such as buildings, machinery, or vehicles) over their useful life. It represents the reduction in the value of an asset over time due to wear and tear, obsolescence, or other factors. Depreciation is a non-cash expense that reflects the decrease in the asset's value on the balance sheet.