Understand CA Foundation Depreciation Accounting
As per the schedule II under the Companies Act, 2013 “Depreciation is the systematic allocation of the depreciable amount of an asset over it the useful life.”
Concept and accounting of Depreciation is one of the main chapters of paper 1 accounting of CA Foundation 2020 Syllabus. In this chapter, the student will be able to understand the meaning and nature of depreciation, how we determine the amount of depreciation on of property and equipment, what are the various method of depreciation, and advantage and disadvantages of such methods, how to calculate the amount of profit and loss and how to to become acquainted with the counting treatments from the straight-line method to reducing balance method.
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VSI Jaipur is briefly explaining the entire CA Foundation depreciation accounting chapter in this article. Hope this piece of information will help you to understand the simple concept of depreciation and eventually will help you to score good marks in your CA Foundation accounting paper.
Overview of Depreciation /Accounting Chapter
Before moving further students should know that depreciation chapter comes under the second module of the CA Foundation accounting course and ICAI gave 25 to 30 person weightage to this module.
Understand Why do we provide Depreciation
There are four key reasons why we need to calculate the depreciation of every fixed asset.
- To make sure that every operation done through fixed assets is giving expected output.
- To have the correct and true review of the financial position
- To get the correct and accumulated fund amount in case of replacement of assets
- To have the true cost of production.
What are the factors that affect the amount of depreciation:
There are three major factors that affect the amount of expense depreciation for any fixed assets.
- The expected uses the life of assets
- Cost of assets
- The estimated market value of the residual value of an asset
This means any asset you buy with the mindset to keep it for the long term and is basically utilised daily is Fixed assets. When we purchase a fixed asset, we tend to use it regularly. We calculate the cost of these uses and yearly. We allocate such expenditure in the respective accounting period, This amount is called depreciation.
For example, you bought a car for yourself for “x” cost.
You kept that car for almost four years with you and then in the 4th year; you plan to replace the car with the alternative model. Or sell in the market. Now the value of your car will not be X cost, instead, we will evaluate it based on its condition, the kilometre it has run, the market value of the product, and the inflation costs in the market. So now after 4th year, the value of your car would be X-Y=Z. “y” is an expenditure that has been made every year by your fixed assets and is called depreciation.
Why does the value of assets depreciate or decrease with the time?
For knowing the true value of an asset it’s important to calculate the depreciated value of an asset and treat it accordingly. The basic reasons the value of an asset its decreases or depreciated passage are:
- Wear and Tear of the assets towards regular use in business or in personal use.
- Even if the asset is not used, the time that has been spent or effused.
- The technology has become obsolete.
- The market value of assets decreases.
Methods of Providing Depreciation
Basically, there is a formula for calculating depreciation in accounting. The other three methods of calculating depreciation are;
1) The straight-line method also known as the Original cost method or Fixed Installment method:
In this method, we consider that the residual value of the assets does not change, and the result is a constant change over the useful life.
2) Diminishing Balance Method:
In this method, the result will be always decreasing over the period of useful life.
3) Units of Production method:
In this method, we expect the result to change with the use of output.
The student must carefully understand the nature of the assets and the condition under which they use it and then choose the appropriate method of providing depreciation,
Download depreciation Chapter in PDF format
ICAI has revised the CA Foundation syllabus under the new scheme; students can download the Chapter for CA Foundation Depreciation from the link below.
Depreciation practical problem:
On 1st July 2008, a company purchased a machine for Rs 3,90,000 and spent Rs 10,000 on its installation. It provided depreciation @ 15% per annum, using a written down value method. On 30th November 2011, they dismantled the machine at a cost of Rs 5,000 and then sold for Rs 1,00,000.
On 1st December 2011, the company gained and put into operation a new machine at a total cost of Rs 7,60,000. They provided depreciation on the new machine on the same basis as had been used with the earlier machine. The company closes its books of account every year on 31st March.
Prepare Machinery Account and Depreciation Account for four accounting years ended 31st March. 2012:
The cost of machinery in use with a firm on 1st April 2011 was Rs 2,50,000 against which the depreciation provision stood at Rs 1,05,000 on that date; the firm provided depreciation at 10% of the diminishing value.
On 31st December 2011 two machines costing Rs 15,000 and Rs 12,000 respectively, both purchased on 1st October 2008, had to be discarded because of damage and had to be replaced by two new machines costing Rs 20,000 and Rs 15,000 respectively.
They sold one of the discarded machines for Rs 8,000; against the other, they expected it that Rs 3,000 would be realisable.
Show the relevant accounts in the ledger on the firm for the year ended 31st March 2012.
Metropol Ltd. gained a machine for Rs 5,40,000 on 1st April 2009. Depreciation was to be charged at 20% per annum on the straight line method.
On 1st October 2011, they made a modification to improve its technical efficiency at a cost of Rs 50,000 we considered which would also extend the useful life of the machine by two years. They replaced an important component of the machine at a cost of Rs 10,000 because of excessive wear and tear.
Routine maintenance during the accounting year ending 31st, March 2012 cost Rs 7,500.
Show for the year ending 31st, March 2012:
CA Foundation Accounts Questions for Practise 2020
ICAI has revised the syllabus under the new scheme. Students can download the practice question for Foundation accounting exams May 2019 from here.
CA Foundation Accounts Question Papers with Suggested Answers
ICAI has revised the syllabus under the new scheme. The student can download the CA Foundation question papers with suggested answers of Accounts.
For the new scheme
|Question Papers||Suggested Answers|
|November, 2018||November, 2018|
|May, 2018||May, 2018|
CA Foundation Accounts Mock Test Papers 2020
ICAI has revised the syllabus under the new scheme. Students can download the suggested Mock Test Paper of Principles and Practice of Accounting from here.
CA Foundation Accounts RTP 2020
ICAI has revised the syllabus under the new scheme. Students can download the RTP of Principles and Practice of Accounting from here.
The formula of Depreciation:
The formula to calculate the depreciation is
***Depreciation= Depreciable amount/ Estimated Useful Life
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