Depreciation is distribution of total cost of an asset over its useful life.
Depreciable asset
• Is held by an enterprise for use in the production or supply of goods and services
• Is not meant for sale in ordinary course of business
• Is expected to be used during more than one accounting period
• Has limited useful life
Residual value is the value realized at the end of useful life of machinery
Useful life is the period over which the asset is expected to be used or similar units expected to be obtained from the use of the item.
Useful life is affected by the number of shifts used.
If estimated useful life is insignificant, then the value will be nill.
Methods of depreciation
- Straightline method
- WDV method
- sum-of-the-years digits method
- The production-units method
WDV and sum-of-the-years digits method are accelerated methods.
WDV is also known as diminishing-balance method
Accelerated methods are more consistent to the matching principle.
Do not forget to remember the formulaes of WDV , Straight line method, SUM-OF-DIGITS and Production units method.
Straight line method is the simplest
When output of asset fluctuates, production-units method is a better choice.
pro rata depreciation - When an asset is purchased during an accounting period, depreciation for the period is computed proportionate to the period it is held.
WDV rates are higher in initial years and gradually it reduces.
WDV has a time value
Depreciation method can be changed if
- Change is required to comply with provisions of any AS
- Change is required to comply with a statute
- Change is necessary for better presentation of the financial statement
Working capital = Current liability - Current asset
Depreciation is above the line item
Depreciation is
- A historical cost
- Depends on past experience and judgement
Recording
Go through the below link for recording related concepts
Click here
Inventory Valuation
Inventories consist of assets held
- For Sale
- Raw material and W.I.P
- In the form of materials or supplies to be consumed in the production process stores,spares,consumables,raw material
AS-2 does not cover
(a) work in progress arising under construction contracts, including directly related service contracts (see Accounting Standard (AS) 7, Accounting for Construction Contracts);
(b) work in progress arising in the ordinary course of business of service providers;
(c) shares, debentures and other financial instruments held as stock-in-trade; and
(d) producers' inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to the extent that they are measured at net realisable value in accordance with well established practices in those industries.
Inventory valuation affects
- Gross profit
- Net profit
- Opening stock/Closing stock
- Shareholder's equity
Cost of inventory includes
- Cost of purchase
- Cost of conversion
- Other costs incurred in bringing the inventories to their present location and condition.
Cost Formulas
- Special Identification method
- FIFO
- LIFO
Normal capacity - Production expected to be achieved over a period of years under normal circumstances taking into account loss of capacity which results because of plant maintenance.
In case of low production allocation for fixed production overhead per unit of output shall not increase
In case of over production allocation for fixed overhead per unit of output shall decrease.
Recording
Assets+Expenses+Dividend = Liabilities+Capital+Revenue
Account is a statement for which you collect information
Carrying cost is the cost at which the asset is carried
Recoverable cost = Higher of Net Selling Price and Value in use
