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What is Depreciation and its Accounting?

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Lima Dutta
What is Depreciation and its Accounting?

Every asset a business owns is susceptible to lose its original value over the years. Thus, we will say that depreciation is that the ‘loss of value’.

For instance, you buy any machinery for the assembly of products. The business will use that machinery for years then, it'll eventually sell it off. Until, with each passing year, the value will decline or can either say will depreciate. If the business sold off the asset, it must deduct the depreciated value from the value.

We must confine mind that we charge only on tangible assets like machinery, building, equipment, etc. However, like always, there could also be some exceptions like land, whose value increases over the years.

How to Account For It?

Journal entry we pass for depreciation goes like this:

Depreciation a/c Dr.

To Machinery a/c

Depreciation is charged up to the years of estimated life until the first value completely gets eliminated.

Should we've a Depreciation Fund?

Depreciation fund is that the amount adequate to the its value that we keep apart from the profit. Although it's a non-cash transaction, it's still a disguised expense for a business. At the top of the depreciation period, an enormous expense will arise within the sort of a machinery purchase.

It is not mandatory to make any quite fund under any Online Accounting Services. However, it's always better to get on the safe side and stop your business from sudden expenses which will largely affect the revenue.

Methods of Calculation

We can calculate on assets using four methods:

Straight-line method

Written down value method

Sum of year’s digit

Units of production

Among these, the straight-line method of depreciation and written down value method are the foremost prominently used methods in accounting.

Straight Line Value Method:

In the straight-line value method, we charge on assets an equal amount per annum up to the estimated lifetime of the asset. We also know this method as a hard and fast instalment method. After the estimated life is over, the ultimate cost of the asset becomes zero or adequate to its scrap value. Within the straight-line method of depreciation is merely calculated for the period of time of the asset actually being in use. If we only use an asset for 6 months.

How to calculate?

Amount of Depreciation = cost of the asset – scrap value/ total estimated lifetime of the asset

Rate of Depreciation = annual depreciation x 100/ cost of the asset

Written Down Value Method: Written down value method is additionally referred to as the diminishing value method. In this, we charge a hard and fast percentage per annum on the value of the asset. However, the value of asset keeps on declining per annum. We charge depreciation on the first cost within the first year, at the speed which is pre-decided. But in subsequent years, once we calculate depreciation of the present year, we've to deduct the quantity of previous year’s depreciation.

Do I buy a tax break For Depreciation?

It decreases the worth of an asset per annum. It doesn't directly affect internet income or the entire income of the Online Bookkeeping Services in New York within the current financial period. We’ll consider the quantity as an expense you're having within the current year. Showing within the books of accounts will grant you major tax benefits. If you charge a better rate on the asset, it'll subsequently decrease your taxable amount due within the period.

What Is Depreciation associated with Differed Tax?

Differed liabilities may be a situation arises when there's a difference between rate and method of depreciation the corporate charges and therefore the tax governing the body of the country fixes a particular amount or percentage.

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