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AbhishekBatabyal
AbhishekBatabyalCurious
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  1. Ayushi Curious Pursuing CA

    Today, mobile phones especially smartphones are an indispensable part of most businesses and they qualify as fixed assets as they usually last for more than a year. Being a fixed asset, the depreciation on mobile phones is to be provided. The rate of depreciation to be charged on mobile phones is 15Read more

    Today, mobile phones especially smartphones are an indispensable part of most businesses and they qualify as fixed assets as they usually last for more than a year. Being a fixed asset, the depreciation on mobile phones is to be provided.

    The rate of depreciation to be charged on mobile phones is 15% WDV* as per the Income Tax Act. The rates as per the companies act, 2013 are 4.75% SLM** and 13.91% WDV*.

    *Written Down Value **Straight Line Method

    A company has to charge depreciation on mobiles in their books as per the rates of Companies Act, 2013.

    Any business or entity other than a company can choose the rate as per the Income Tax Act, 1961 which is 15% WDV. It is a general practice for non-corporates to charge depreciation in their books as per the rates of the Income Tax Act.

    An important thing to know is that as per the Income Tax Act, 1961, mobile phones are treated as plants and machinery and the general rate of 15% is applied to it.

    One may consider mobile phones as computers and charge depreciation at the rate of 40%. However, such a practice is not correct. Mobile phones are not considered equivalent to computers and there is case judgment given by Madras High Court which backs this consideration. The case is of Federal Bank Ltd. vs. ACIT (supra).

    Therefore we are bound to this case judgment and should treat mobile phones as part of plant and machinery and charge depreciation on it accordingly for the time being.

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AbhishekBatabyal
AbhishekBatabyalCurious
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  1. Ayushi Curious Pursuing CA
    This answer was edited.

    The Income Tax 1961 does not provide any rate of depreciation specifically for cameras. But we can consider camera within the block of ‘Computer including software’ for which the rate of depreciation is 40% at WDV method. It is a general practice for non-corporates to charge depreciation at rates slRead more

    The Income Tax 1961 does not provide any rate of depreciation specifically for cameras. But we can consider camera within the block of ‘Computer including software’ for which the rate of depreciation is 40% at WDV method.

    It is a general practice for non-corporates to charge depreciation at rates slightly lower than the rate provided by the Income Tax Act, 1961. But one cannot charge depreciation more than it.

    In the case of corporate, the rates for charging depreciation are provided by the Companies Act 2013, which is

    • 20.58% WDV and 7.31% SLM for cameras to be used for the production of cinematography and motion pictures.
    • 25.89% WDV and 9.50% SLM for cameras which is part of electrical installations and equipment (CCTV cameras).

    Let’s take an example:

    Mr X is a jewellery shop owner and has installed CCTV cameras on 1st April 2021, costing ₹ 40,000 at various points in his shop to ensure safety and security. Keeping in mind the Income-tax rates, his accountant decided to charge depreciation @ 30% p.a. on the CCTV cameras.

    Following is the journal entry:

    The balance sheet will look like this:

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Sandy
Sandy
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Depreciation
  1. 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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Jasmeet_Sethi
Jasmeet_Sethi
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  1. prashant06 B.com, CMA pursuing
    This answer was edited.

    Let me brief you about the nature of computers, their parts, laptops according to the companies act 2013. Basically, these are treated as non-current tangible fixed assets. This is because these types of equipment are used in business to generate revenue over its useful life for more than a year. AsRead more

    Let me brief you about the nature of computers, their parts, laptops according to the companies act 2013. Basically, these are treated as non-current tangible fixed assets. This is because these types of equipment are used in business to generate revenue over its useful life for more than a year. As per the companies act 2013, the following extract of the depreciation rate chart is given for computers.

    Giving you a short example, suppose M/s spy Ltd purchased 20 computers worth Rs 30000 each. As per the companies act 2013, the computer’s useful life is taken to be 3 years, and the rate of depreciation rate is 63.16%. Applying the WDV method we can calculate depreciation as follows:

     Depreciation as per WDV = (Cost of an asset – salvage value)* Depreciation rate

    So for the first year, the depreciation amount will be

    Cost of computers = Rs 6,00,000 (20*30000)

    Salvage value = NIL

    Rate of depreciation as per the Act = 63.16%

    Therefore depreciation = (6,00,000 – NIL)* 63.16%

    = Rs 3,78,960

    this amount of depreciation will be shown in the profit & loss account as depreciation charged to computers and the same will be adjusted in the balance sheet. The extract of Profit & Loss and corresponding year Balance sheet is shown below.

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Simerpreet
SimerpreetCurious
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AmortizationDifference BetweenImpairment
  1. Astha Leader Pursuing CA, BCom (Hons.)
    This answer was edited.

    Let us first understand the concepts of Amortization and Impairment. Amortization refers to the expense recorded on the decline of the value of intangible assets of a company. Intangible assets include goodwill, patents, copyrights, etc. It reflects the reduction in the value of Intangible assets ovRead more

    Let us first understand the concepts of Amortization and Impairment.

    Amortization refers to the expense recorded on the decline of the value of intangible assets of a company. Intangible assets include goodwill, patents, copyrights, etc. It reflects the reduction in the value of Intangible assets over its life span.

    Amortization is similar to Depreciation, however, while depreciation is over tangible assets amortization is over Intangible assets of the company.

    For example, Cipla Ltd. acquired a patent over a new drug for a period of 10 years. The cost of creating the new drug was 80,000 and the company must record its patent at 80,000. However, the company must amortize this cost by dividing the cost over the patent’s life, i.e., the amortization cost would be 8,000 (80,000/10) p.a. for the next 10 years.

    Impairment means a decline in the value of fixed assets due to unforeseen circumstances. Assets are impaired when the carrying value of assets increases its market value or “realizable value” and such increase is recorded as an impairment loss.

    Now suppose, Cipla Ltd. had existing machinery which suffered physical damage and is recorded at 50,000 in the books but the realizable value of the asset would only be 20,000. Hence, the asset would be written down to 20,000 and an impairment loss of 30,000 will be recorded.

    Impairment Vs Amortization

    Differences between the two can be shown as follows:

    Amortization Impairment
    Amortization is a reduction in the value of Intangible Assets over their useful life. Impairment is a reduction in the value of assets due to unforeseen circumstances.
    Amortization is a continuous process and the value of an asset reduces over time. Value of asset reduces drastically, creating a need to write down the value to its fair market value.
    Amortization is charged annually. Impairment is not an annual charge.
    Amortization is shown as an amortization expense. Impairment is shown as an impairment loss.
    Reasons for amortization includes consumption, obsolescence, etc. Reasons for impairment include damage to the asset, change in preferences, etc.
    Amortization is charged on Intangible assets Impairment is charged on fixed assets whether tangible or intangible.

    Suppose Unilever Ltd. has a patent over one of its products for a period of 5 years. The cost of the patent was 1,00,000. Then after 2 years one of its rivals, say ITC Ltd., launches a new product which is more preferred by the consumers over the one produced by Unilever Ltd. and the fair market value of the patent of Unilever Ltd. changes to 10,000.

    Now in this scenario, Unilever Ltd. would have amortized the patent (costing 1,00,000) at 20,000 (1,00,000/5) p.a. for 2 years and the book value at the end of the 2nd year is 60,000 (1,00,000 – 40,000). Now due to the new launch by ITC Ltd. the drastic change in the value of the asset from the book value of 60,000 to the realizable value of 10,000 will be recorded as an Impairment loss. Hence Impairment loss would be recorded at 50,000 (60,000 – 10,000).

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Aadil
AadilCurious
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book value replacement value depreciable value market value

Depreciation
  1. Vijay Curious M.Com
    This answer was edited.

    The total depreciation of an asset cannot exceed its 3. depreciable value.  Depreciable value means the original cost of the asset minus its residual/salvage value. The asset's original cost is inclusive of the purchase price and other expenses incurred to make the asset operational. To put it simplRead more

    The total depreciation of an asset cannot exceed its 3. depreciable value. 

    Depreciable value means the original cost of the asset minus its residual/salvage value. The asset’s original cost is inclusive of the purchase price and other expenses incurred to make the asset operational. To put it simply,

    The accumulated depreciation on an asset can never exceed its depreciable value because depreciation is a gradual fall in the value of an asset over its useful life. Only a certain percentage of the asset’s book value/original cost is shown as depreciation every year. So, it is impossible/illogical for the accumulated depreciation of an asset to exceed its depreciable value.

    Let me show you an example to make it more understandable,

    Amazon installs machines to automate the job of packing orders. The original cost of the machine is $1,000,000. Now let’s assume,

    The estimated useful life of the machine – 10 years.

    Residual value at the end of 10 years – $50,000.

    Method of depreciation – Straight-line method.

    The depreciable value of the machine will be $950,000 (1,000,000 – 50,000). The depreciation for each year under SLM will be calculated as follows:

    Depreciation = (Original cost of the asset – Residual/Salvage Value) / (Useful life of the asset)

    Applying this formula, $95,000 (1,000,000 – 50,000/10) will be charged as depreciation every year. The accumulated depreciation at the end of 10 years will be $950,000 (95,000*10). As you can see, the accumulated depreciation ($950,000) of the machine does not exceed its depreciable value ($950,000).

    Thus, the total depreciation of an asset cannot be more than its depreciable value.

     

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Simerpreet
SimerpreetCurious
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  1. [email protected] (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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Naina@123
[email protected]
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  1. Radha M.Com, NET
    This answer was edited.

    The rate of depreciation on a car as per the Income Tax Act depends upon the purpose for which it has been purchased and the year on which it was acquired. As per the Income Tax Act, cars come under the Plant and Machinery block of assets. The Act classifies cars into two categories, Group 1 - MotorRead more

    The rate of depreciation on a car as per the Income Tax Act depends upon the purpose for which it has been purchased and the year on which it was acquired.

    As per the Income Tax Act, cars come under the Plant and Machinery block of assets.

    The Act classifies cars into two categories,

    • Group 1 – Motor cars other than those used in the business of running them on hire.
    • Group 2 – Motor taxis used in the business of running them on hire.

     

    Group 1:

    1. If the motor car is acquired and put to use on or after 23rd August 2019 but before 1st April 2020, then the rate applicable is 30%.
    2. If the motor car is acquired and put to use on or after 1st April 1990, then the rate applicable is 15%. (All the cars which are not covered under the category (1) comes under this category.)

     

    Group 2:

    1. If the motor taxi is acquired and put to use on or after 23rd August 2019 but before 1st April 2020, then the rate applicable is 45%.
    2. The rate applicable for motor taxis not covered under category (1) is 30%.

     

    Here is a summarised version of the rates applicable to cars,

     

    The rates can also be found on the Income Tax India website.

     

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Simerpreet
SimerpreetCurious
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  1. Karan B.com and Pursuing ACCA
    This answer was edited.

    Software is not depreciated but amortized, as it is an intangible asset. As per companies act the useful life of software is 3 years. The treatment of depreciation is the same as computers. Following are the software depreciation rates as per the companies act: As of 2021 Nature of Asset Useful LifeRead more

    Software is not depreciated but amortized, as it is an intangible asset. As per companies act the useful life of software is 3 years. The treatment of depreciation is the same as computers. Following are the software depreciation rates as per the companies act:

    As of 2021

    Nature of Asset Useful Life Depreciation
    WDV SLM
    Servers and networks 6 years 39.30% 15.83%
    End-user devices such as desktops, laptops, etc. 3 years 63.16% 31.67%

    For example, XYZ Ltd purchased a new accounting software on 1 October for Rs.50,000. As per the Companies Act, the useful life of software is 3 years. Hence, the software will be amortized for 3 years and the company amortizes on the straight-line method.

    Amortization amount = 50,000*31.67%

    For full year = Rs.15,835

    As the software was purchased on 1 October hence it will be amortized for 6 months.

    For 6 months = 15,835*6/12

    = Rs.7,917.50

    Amortization is the same as depreciation. Hence, treatment will also be the same. The amortization amount will be transferred to the Profit & Loss A/c on the debit side as a non-cash expense.

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Karan
Karan
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  1. prashant06 B.com, CMA pursuing
    This answer was edited.

    As per the Income-tax act, solar panels are categorized under the heading renewal energy devices. The rate of depreciation for these devices is mentioned below. As per the act, the rate of depreciation for solar panels is given as 40% as per the WDV method. Generally, these devices are treated as inRead more

    As per the Income-tax act, solar panels are categorized under the heading renewal energy devices. The rate of depreciation for these devices is mentioned below.

    As per the act, the rate of depreciation for solar panels is given as 40% as per the WDV method. Generally, these devices are treated as investments in fixed assets. Therefore they are treated accordingly like other fixed assets and are depreciated periodically in an organized and regular time period. The useful life of such solar devices is taken to be 5 years.

    Giving you a small example of the depreciation on solar panels.

    Solar panels were purchased by Agro Farm ltd. for installing them to be used for electricity generation. These panels were bought for Rs 2,00,000. Therefore depreciation to be charged as per income tax act over its useful life of 5 years is as follows:

    Depreciation as per WDV = (Cost of an asset – salvage value)* rate of depreciation

    Depreciation for 1st year = (2,00,000 – 0)* 40% = Rs 80,000

    WDV at the end of 1st year = (2,00,000 – 80,000) = Rs 1,20,000

    Depreciation for 2nd year = (1,20,000 – 0)* 40% = Rs 48,000

    the same process will continue till the useful life of an asset.

    The depreciation amount will be written off from the book value as shown below:

    Useful life Value at the beginning of the year Depreciation amount Value at the end of the period
    1 2,00,000 80,000 1,20,000
    2 1,20,000 48,000 72,000
    3 72,000 28,800 43,200
    4 43,200 17,280 25,920
    5 25,920 10,368 15,552

     

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