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Sandy
Sandy
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Depreciation
  2. Nistha Pursuing B.COM H (B&F) and CMA
    This answer was edited.

    Depreciation refers to that portion of the value of an asset that is written off over the useful life of the asset due to wear and tear. Now, when we talk about depreciation, there are multiple methods to calculate depreciation such as: Straight Line Depreciation Method Diminishing Balance Method OrRead more

    Depreciation refers to that portion of the value of an asset that is written off over the useful life of the asset due to wear and tear.

    Now, when we talk about depreciation, there are multiple methods to calculate depreciation such as:

    • Straight Line Depreciation Method
    • Diminishing Balance Method Or Written Down Value Method
    • Sum of Years’ Digits Method
    • Double Declining Balance Method
    • Sinking Fund Method
    • Annuity Method
    • Insurance Policy Method
    • Discounted Cash Flow Method
    • Use Based Methods
      • Output Method
      • Working Hours Method
      • Mileage Method
    • Other Methods
      • Depletion Method
      • Revaluation Method
      • Group or Composite Method

    The most commonly used methods are discussed below:

    1. Straight Line Depreciation Method: This is the simplest method for calculating depreciation where a fixed amount of depreciation is charged over the useful life of the asset.

    Formula:

    Suppose a company Bear Ltd purchases machinery costing 8,00,000 with useful life of 10 years and salvage value 1,00,000. Then depreciation charged to the machinery each year would be:

    Depreciation = (8,00,000 – 1,00,000)/10 = 7,00,000/10 = 7,000 p.a.

    2. Diminishing Balance Method Or Written Down Value Method: Under this method, a fixed rate of depreciation is charged every year on the opening balance of the asset which is the difference between the previous year’s opening balance and the previous year’s depreciation. Here the book value of asset reduces every year and so does the depreciation amount.

    Formula:

    Suppose a company Moon ltd purchases a building for 50,00,000 with a useful life of 5 years and decides to depreciate it @ 10% p.a. on Diminishing Balance Method. Then depreciation charged to the machinery would be:

    3. Sum of Years’ Digits Method: In this method, the life of asset is divided by the sum of years and multiplied by the cost of the asset to determine the depreciating expense. This method allocates higher depreciation expense in the early years of the life of the asset and lower depreciation expense in the latter years.

    Formula:

    Suppose a company Caps Ltd purchases machinery costing 9,00,000 having a useful life of 5 years. Then the depreciation cost would be:

    4. Double Declining Balance method: This method is a mixture of straight-line method and diminishing balance method. A fixed rate of depreciation is charged on the reduced value of the asset at the beginning of the year. This rate is double the rate charged under straight-line method.

    Formula:

    Suppose a company Paper Ltd purchases machinery for 1,00,000 with an estimated useful life of 8 years. Then the depreciation rate would be:

    Straight line = 100%/8 = 12.5%

    Double declining method = 2*12.5% = 25%

    5. Sinking Fund Method: Under this method, the amount of depreciation keeps on accumulating till the asset is completely worn out. Depreciation is the same every year. Profits equal to the amount of depreciation is invested each year outside the company. At the time of replacement of the asset the investments and sold and the proceeds thereof are used to purchase the new asset.

    6. Annuity Method: This method calculates depreciation by calculating its internal rate of return (IRR). Depreciation is calculated by multiplying the IRR with an initial book value of the asset, and the result is subtracted from the cash flow for the period.

    7. Use Based Methods: Depreciation, under these methods, is based on the total estimated machine hours or total estimated units produced during the life of the machine. It is calculated by dividing the cost of the machine by the estimated total machine hours or estimated lifetime production in units and multiplying by the units produced or machine hours worked.

    Formula:

    Suppose a company Box Ltd purchases machinery for 25,000 (estimated life 5 years) whose estimated life production is 5,000 units. If it produces 700 units in the first year of operation then depreciation cost would be:

    Depreciation = 25,000/5,000*700 = 3,500

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Simerpreet
SimerpreetHelpful
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  2. Naina@123 (B.COM and CMA-Final)
    This answer was edited.

    As per the companies act 2013, the rate of depreciation for cars/vehicles and their useful life is mentioned below  They are categorized by the companies act as follows: when these car/ motor vehicles are owned with no intention to sell within the accounting period and are generally used to generateRead more

    As per the companies act 2013, the rate of depreciation for cars/vehicles and their useful life is mentioned below

     They are categorized by the companies act as follows:

    1. when these car/ motor vehicles are owned with no intention to sell within the accounting period and are generally used to generate revenue. For example, giving cars/motor vehicles on lease or hire purpose.
    2. cars/motor vehicles when used for purposes other than the business of hire. For example, a car is owned for official use.

    Car/motor vehicles are considered as fixed tangible assets. Treatment of these cars/ motor vehicles is similar to those of other fixed assets. The depreciation will be shown as an expense in the profit and loss account and also the value of these assets will be adjusted in the balance sheet.

    Explaining with a simple example:  Mars.Ltd purchased a car for Rs 10,00,000, and use it for its official purpose. Its useful life as per act is taken as 6 years and the rate of depreciation as 31.23% as per the WDV method.

    Therefore depreciation as per WDV is calculated as follows

    Cost of car = Rs 10,00,000

    Residual value = NIL

    Rate of depreciation = 31.23%

    depreciation for first-year = Rs (10,00,000 – NIL)*31.23%

    = Rs 3,12,300

    Calculated depreciation on this car will be shown in the profit and loss account as an expense and the same will be treated under the balance sheet every year. Here is the extract of profit and loss and the balance sheet for the above example.

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Aadil
AadilCurious
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  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    The journal entry for Cash Sales is- Particulars Amount Amount Cash A/c                                                      Dr $$$      To Sales A/c $$$ Sales Account is a Revenue Account and Cash Account is an Asset Account for the business. So, According to the modern approach for Sales account:Read more

    The journal entry for Cash Sales is-

    Particulars Amount Amount
    Cash A/c                                                      Dr $$$
         To Sales A/c $$$

    Sales Account is a Revenue Account and Cash Account is an Asset Account for the business.

    So, According to the modern approach for Sales account:

    • When there is an increase in the Revenue, it is ‘Credited’.
    • When there is a decrease in the Revenue, it is ‘Debited’.

     

    According to the Modern approach for Cash  account:

    • When there is an increase in the Asset, it is ‘Debited’.
    • When there is a decrease in the Asset, it is ‘Credited’.

     

    So, the journal entry here is about cash sales and since there is an increase in Revenue on account of goods being sold, the sales account will be credited as per the modern rule and due to the increase in cash on account of sales, cash account will be debited.

    For Example, Polard sold goods for cash worth Rs 2,000 for his business.

    I will try to explain it with the help of steps.

    Step 1: To identify the account heads.

    In this transaction, two accounts are involved, i.e. Cash A/c and Sales A/c.

    Step 2: To Classify the account heads.

    According to the modern approach: Sales A/c is a Revenue account and Cash A/c is an Asset account.

    Step 3: Application of Rules for Debit and Credit:

    According to the modern approach: As Sales increases, because goods have been sold, ‘Sales A/c’ will be credited. (Rule – increase in Revenue is credited).

    Cash account is an Asset account. As cash has been received on account of goods sold, there is an increase in assets and hence Cash account will be debited (Rule – increase in Asset is debited).

    So from the above explanation, the Journal Entry will be-

    Particulars Amount Amount
    Cash A/c                                                      Dr 2,000
         To Sales A/c 2,000

     

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Aadil
AadilCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    You must have knowledge of what depreciation is. Depreciation is the process of allocating the value of an asset over its useful life. It reduces the carrying value of the asset year by year till it is scraped. It is an expense (expense of using the asset for business purposes) and it is charged toRead more

    You must have knowledge of what depreciation is. Depreciation is the process of allocating the value of an asset over its useful life. It reduces the carrying value of the asset year by year till it is scraped.

    It is an expense (expense of using the asset for business purposes) and it is charged to profit and loss account.

    Depreciation can be reported in the financial statement in two ways:

    1. Deduct depreciation from the asset account and show the asset at “depreciation less” value. See the journal entries below:

    1. Maintain a provision for depreciation account and show the asset account at original cost. In this method, no entry is passed through the asset account. See the journal entries below:

     

    Provision for depreciation account represents the collection of total depreciation till date on an asset. That’s why it is also called accumulated depreciation account. When an asset is sold, its accumulated depreciation is credited to the asset account. See the journal entry below:

    It is shown on the liabilities side of the balance sheet. It is a nominal account because it is shown as an expense in the statement of profit or loss.

    In case provision for depreciation account is not maintained then the balance sheet looks like this:

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Karan
Karan
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Difference BetweenDissolution of FirmDissolution of Partnership
  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be: Admission of a partner Death of a partner Retirement of a partner Dissolution of firm In the event of the above cases, the existing partnership is dRead more

    Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be:

    • Admission of a partner
    • Death of a partner
    • Retirement of a partner
    • Dissolution of firm

    In the event of the above cases, the existing partnership is dissolved and a new partnership is created with the new partners without affecting the firm.

    A new partnership deed is created, in case there is a partnership deed agreed among partners and new profit-sharing ratios among the partners are decided, while the assets and liabilities of the firm remain the same.

    Dissolution of a firm means the firm no longer exists. Various reasons for the dissolution of a partnership firm could be:

    • Mutual decision of partners
    • By the court of law

    A partnership firm is dissolved by a court of law when there has been a non-compliance of law, the firm is engaged in illegal practices, or that the court’s opinion is that it is in the public interest for the firm to be dissolved.

    The partnership is also dissolved with the dissolution of the firm but the converse need not be true.

    When a firm is dissolved, there is a sequence that is followed to pay creditors and partners.

    • First, outside creditors like banks, third party creditors are paid firstly with the cash available with the firm and then by selling the assets.
    • Second, partners who have lent money in the form of a loan to the firm are paid.
    • Lastly, if there is any surplus, partners are paid with the amount of their capital. In case of loss, partners are required to pay from their personal assets.

    Dissolution of the firm can be done by the partners themselves and they could also appoint a third person to do so on the payment of fees, charges, the proportion of surplus, or any contract that has been agreed to.

    To summarize, we can a draw a difference table as follows:

    Dissolution of Partnership Dissolution of Partnership Firm
    The partnership ends but the firm still stands. A partnership firm no longer exists.
    A new partnership deed is created by the mutual agreement of partners. A new partnership firm is created if the partners decide.
    Reasons:

    ·        Admission

    ·        Retirement

    ·        Death

    		 Reasons:

    ·        By court

    ·        Mutual decision of partners
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Bonnie
BonnieCurious
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  2. Radhika
    This answer was edited.

    A cash flow statement is a statement showing the inflow and outflow of cash and cash equivalents during a financial year. Cash Flow Statements along with Income statements and Balance Sheet are the most important financial statements for a company. The Cash Flow Statement provides a picture to the sRead more

    A cash flow statement is a statement showing the inflow and outflow of cash and cash equivalents during a financial year. Cash Flow Statements along with Income statements and Balance Sheet are the most important financial statements for a company.

    The Cash Flow Statement provides a picture to the shareholders, government, and the public of how the company manages its obligations and fund its operations. It is a crucial measure to determine the financial health of a company.

    The Cash Flow Statement is created from the Income Statement and the Balance Sheet. While Income Statement shows money engaged in various transactions during the year, the Balance Sheet presents information about the opening and closing balances.

    The primary objective of a Cash Flow Statement is to present a record of inflow and outflow of cash, cash equivalents, and marketable securities through various activities of a company.

    Various activities in a company can be broadly classified into three parts or heads:

    • Cash Flow from Operating Activities: it represents how money from regular business activities is derived and spent. It includes Net Profit from Income Statement after adjusting for tax and extra-ordinary activities. Items included in Operating Activities are adjustments in Working Capital. If current liabilities are paid or current assets are bought it means outflow of cash, hence it is deducted and if liabilities are increased or assets are sold it means the inflow of cash, hence it is added. Operating Activities take into account taxation, dividend, depreciation, and other adjustments.
    • Cash Flow from Investing Activities: it represents aggregate inflow or outflow of cash due to various investments activities that the company was engaged in. Purchase and sale of non-current assets like fixed assets and long-term investments are considered under this head. If there is an investment made, it means outflow of cash, hence it is deducted and if there is an investment sold it means the inflow of cash, and hence it is added.
    • Cash Flow from Financing Activities: it represents the activities that are used to finance a company’s operations, like, issue of cash or debentures, paying dividends and interest, long-term borrowing taken by a company, etc. If these are paid, it means outflow of cash and is hence deducted and if they are acquired, it means the inflow of cash and hence ae added.

    Cash Flow Statements also present a picture of the liquidity of the company and are therefore used by the management of a company to take decisions with the help of the right information.

    Cash Flow Statements are a great source of comparison between a company’s last year’s performance to its current year or with other companies in the same industry and hence, helps shareholders and potential investors to make the right decisions.

    It also helps to differentiate between non-cash and cash items; incomes and expenditures are divided into separate heads.

     

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Anushka Lalwani
Anushka Lalwani
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    In a partnership firm, the partners may withdraw certain amounts from the firm for their personal use. Such amounts withdrawn by the partners are called drawings. This amount is usually deducted from their capital. The partners are required to pay an amount as interest, based on the time period forRead more

    In a partnership firm, the partners may withdraw certain amounts from the firm for their personal use. Such amounts withdrawn by the partners are called drawings. This amount is usually deducted from their capital. The partners are required to pay an amount as interest, based on the time period for which the money was withdrawn. This amount is called Interest on Drawings.

    The journal entry for interest on drawings is as follows:

    Since interest on drawings is an income to the firm, it is credited based on the rule that “increase in incomes are credited”. Since the partner has to bear the interest amount, his capital account is debited as a “ decrease in capital is debited”.

     

    FORMULAS

    The basic formula for interest on drawings is:
    Interest on drawings = Amount of Drawings x Rate/100 x No. of months/12

    1. When equal amounts of drawings are withdrawn at the beginning of every month, then
      Interest on Drawings = Total Drawings x Rate/100 x (12+1)/2
    2. When equal amounts of drawings are withdrawn at the end of every month, then the Interest on Drawings = Total Drawings x Rate/100 x (12-1)/2
    3. When the date of the drawing is not specified, it is assumed to be withdrawn evenly. Hence Interest on Drawings = Total Drawings x Rate/100 x 6/12

    The calculations in 1,2 and 3 are done so that drawings can be calculated for the average period.

     

    EXAMPLE

    Jack is a partner who withdrew $20,000 on 1st April 2020. Interest on drawings is charged at 10% per annum. If we have to calculate interest on drawings as of 31st December, then

    Interest on Drawings = 20,000 x 10/100 x 9/12 = $1,500
    (Here, interest on drawings is outstanding for 9 months, that is from April to December)

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