This GSEB Class 11 Commerce Accounts Notes Part 2 Chapter 2 Depreciation Accounts covers all the important topics and concepts as mentioned in the chapter.
Depreciation Accounts Class 11 GSEB Notes
Generally depreciation is to be calculated on fixed assets. There are two types of fixed assets :
- Tangible assets like Land, Building, Plant and Machines, Furniture and Fixtures, etc.
- Intangible assets like Goodwill, Patent, Trademark, Copyright, etc.
All business expenses, losses and incomes are considered to ascertain the profit or loss of the business. As depreciation is a revenue expenditure, it is essential to consider depreciation to know the true and fair profit- loss of the business. Thus, it is debited to Profit and Loss Account.
We shall discuss about the meaning, characteristics, objectives, factors and different methods of depreciation in this chapter.
→ Depreciation means a gradual and permanent reduction in the value of an asset due to any reason.
→ Depreciation is a non-cash revenue expense, it is time related expense.
→ Depreciation is recorded to debit side of Profit and Loss Account.
→ Depreciation indicates continuous and permanent reduction in the useful value of assets.
→ Depreciation is to be calculated on fixed tangible assets, thus these assets are known as depreciable assets.
→ Intangible assets like patent, copyright, trademark are gradually written off during their estimated life.
→ Depreciation is not calculated on current and liquid assets of the business, e.g., Cash, Stock Debtor, etc.
→ There are two widely used and popular methods of depreciation :
- Straight Line Method
- Reducing Balance Method
→ The other name of Straight Line Method is Fixed Instalment Method.
→ The other name of Reducing Balance Method is Written Down Value Method.
→ In Fixed Instalment Method, depreciation is calculated on the cost price of the asset. The amount of depreciation for each year remains equal in this method.
→ Fixed Instalment Method of depreciation is appropriate for those assets, whose, useful estimated life can be determined very easily, e.g., Leasehold properties, Intangible assets, etc.
→ In Reducing Balance Method, depreciation is calculated on opening balance of asset at the predetermined rate. The amount of depreciation goes on decreasing every year.
→ Reducing Balance Method is appropriate for those assets which are of long term use. e.g., Building, Machines, Furniture, Plant, etc.
→ Land is not depreciable asset.
→ From the view point of accounting there are two methods for recording depreciation:
- Method of providing depreciation on the respective assets.
- Method of provision for depreciation.
→ Depreciation provision account is also known as Accumulated Depreciation Account.
→ Different methods of depreciation are as under:
- Straight Line Method
- Reducing Balance Method
- Annuity Method
- Depreciation Fund Method
- Insurance Policy Method
- Revaluation Method
- Compound Interest Method
- Depletion Method
- Mileage Method
- Machine Hour Rate Method
→ As per our syllabus, practical problems only on Straight Line Method and Reducing Balance Method are expected.