Understand CA Foundation Depreciation Accounting for May 2022 Exams

Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is predetermined.

Here are 4 reasons why we need to calculate depreciation on every fixed asset that we or the company owns

• 1. To get the correct and accumulated fund amount in case of replacement of assets
• 2. To make sure that every operation done through fixed assets is giving the expected output.
• 3. To have the true cost of production
• 4. To have the correct and true review of the financial position

There are three major factors that affect the amount of expense depreciation for any fixed assets.

• 1. The expected uses the life of assets
• 2. Cost of assets
• 3. The estimated market value of the residual value of an asset

What these factors basically mean that 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.

Now that we know all about depreciation, here are a few methods of providing Depreciation:-

1) The straight-line method also known as the Original cost method or Fixed Instalment 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.

Formula:-

Annual Depreciation expense = (Asset cost – Residual Value) / Useful life of the asset

2) Diminishing Balance Method: In this method, the result will be always decrease over the period of useful life.

Formula:-

Depreciation = 2 * Straight line depreciation percent * book value at the beginning of the accounting period

Book value = Cost of the asset – accumulated depreciation

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.

Formula:-

Total Depreciation Expense = Per Unit Depreciation * Units Produced

Ultimately, depreciation accounting gives you a much better understanding of the true cost of doing business. To gain a more accurate picture of your company’s profitability, you’ll need to know depreciation, because as assets wear down and become less valuable, they’ll need to be replaced. Depreciation helps you understand how much value your assets have lost over the years, and if you don’t factor it into your revenue, it could mean that you’re underestimating your costs.

Depreciation is one of the scoring topics in Accounts Paper in CA Foundation, and if the concepts are understood properly, they can be very easy to execute and apply in the problems in exams

If you want to score highest score in CA Foundation exams, It is very important to have a regular habit of solving at least 20 questions on all the subjects. DG Sharma’s CAPS Nagpur is one of the best CA Foundation Coaching in Nagpur which gives the best and highest CA Foundation Result every year with the most dedicated study pattern.

We at CAPS Nagpur always guide students to keep practising the ICAI Question papers to get an overview of the CA Foundation Accounting depreciation exam pattern for the planned study.