Loading....
Coupon Accepted Successfully!

 

Change in Method of Depreciation

According to Accounting Standard 6 issued by ICAI, the depreciation method selected should be applied consistently. A change in the method of providing depreciation can be made only in the following cases:
  • Adoption of new method is required by law/accounting standard.
  • The change is necessary for a better presentation of financial statements.

When the method of providing depreciation is changed, the depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective re-computation should be adjusted in the books of accounts by passing an adjusting entry.
 

In case the change in method results in deficiency, the deficiency should be charged to the profit and loss account. In case the change in method results in surplus, the surplus should be credited to the profit and loss account. Such a change should be treated as a change in accounting policy and its effect should be quantified and disclosed.
 

Illustration 13

 

On 1st April 2010, A Ltd. purchased two machines, I and II, costing ₹ 25,000 each and provided depreciation at 10 per cent p.a. on the straight line method basis. At the end of 2014, the company decided to change the method of depreciation from the straight line method to the written down value method retrospectively, the rate of depreciation remaining the same. Prepare the machinery account upto 2014.
 

Solution:
 

Step 1: Calculation of total depreciation already provided on assets existing at the end of the previous accounting year under the old method, up to the end of the previous accounting year:

 

Total depreciation under old method = ₹ 50,000 × 10% × 3 = ₹ 15,000


Step 2: Calculation of the total depreciation on assets existing at the end of the previous accounting year under the new method, up to the end of the previous accounting year:

 

 

A. Cost as on 01-04-2010

50,000

B. Less: Depreciation for 2010

(5,000)

C. Book Value as on 01-04-2011

45,000

D. Less: Depreciation for 2011

(4,500)

E. Book Value as on 01-04-2012

45,500

F. Less: Depreciation for 2012

(4,050)

G. Book Value as on 01-04-2013

36,450


Total depreciation under new method
= ₹ 5,000 + ₹ 4,500 + ₹ 4,050 = ₹ 13,550
 

Step 3: Calculation of the difference between the total depreciation under the old method (as per Step 1) and that under the new method (as per Step 2).
 

 

A. Total Depreciation under old method

15,000

B. Total Depreciation under new method

13,550

C. Difference being excess depreciation

1,450


Step 4: Depreciation for the current accounting year
= 10% of ₹ 36,450 = ₹ 3,645
 

Step 5:
 





Test Your Skills Now!
Take a Quiz now
Reviewer Name