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  • Depreciation is a measure of wearing out, consumption or other loss of the value of a depreciable asset.
  • Depreciation is a charge against profits, that is, an expense to the profit and loss account.
  • Book value of asset on date of sale = Original cost - Total depreciation till the date of sale.
  • Under the straight line method of depreciation, an equal amount of depreciation is written off every year during the useful life of an asset.
  • The straight line method of depreciation is also known as a fixed instalment method or original cost method.
  • Under the reducing balance method of depreciation, a fixed percentage of the diminishing value of the asset is written off each year.
  • The only method that ignores salvage value in the calculation of depreciation is the reducing balance method.
  • When the asset is purchased or sold in middle of the year and if the date of purchase or sale is not given in the problem, then provide the depreciation for half a year (6 months).
  • The annuity method takes into account the interest on amount invested in the purchase of the asset.
  • The sinking fund method not only provides depreciation on the asset, but also makes a provision for the replacement of the asset.
  • A change in the method of providing depreciation can be made only in the following cases:
    – Adoption of a new method is required by law/accounting standard.
    – The change is necessary for a better presentation of financial statements.

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