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Calculation of Depreciation as per Companies Act, 2013 | EGIS Health Care

EGIS Health Care

Calculation of Depreciation as per Companies Act, 2013

We believe everyone should be able to make financial decisions with confidence. And while our site doesn’t feature every company or financial product available on the market, we’re proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward — and free. Other than these, cold storage, cinema studios, administrative blocks, canteens, buildings allotted to employees, temples or churches constructed within factory premises are all considered as buildings. Allowance for depreciation of building is provided as per the Income Tax Act, 1961. The Income Tax Act does not provide any specific definition for the word ‘building’.

Where a company arrives at the amortisation amount in respect of the said Intangible Assets in accordance with any method as per the applicable Accounting Standards, it shall disclose the same. Different furniture bought by an organisation has different tenures of useful life; thus, companies can avail deductions against furniture depreciation for more than one accounting period. When the cost of a portion of the
Asset is essential to the overall cost of the Asset, and its useful time of
that portion is different from the life of the other Asset, the useful life of
the significant portion must be determined on its own.

This method also calculates depreciation expenses using the depreciable base (purchase price minus salvage value). Instead of realizing the entire cost of an asset in year one, companies can use depreciation to spread out the cost and match depreciation expenses to related revenues in the same reporting period. This allows the company depreciation formula as per companies act to write off an asset’s value over a period of time, notably its useful life. Depreciation refers to
decrease in the value of an asset, which appears every year. Depreciation is
calculated based on the rate of Depreciation mentioned in the Act. The
depreciation rate varies from one class of assets to another class assets.

  1. We will continue this process until the asset is reduced to its residual value at the end of the asset’s life.
  2. Because you’ve taken the time to determine the useful life of your equipment for depreciation purposes, you can make an educated assumption about when the business will need to purchase new equipment.
  3. AS – 26 specifies that intangible assets should be amortized in the ratio of future economic life of the asset.
  4. Useful life specified in Part C of the Schedule is for whole of the asset.

Depreciable assets are those assets that are used for the purpose of business which can be depreciated. That is, the value of the asset is considered as a business expense over the useful life of the asset. A company can depreciate most of the tangible assets like Building, Machinery, Vehicles, Furniture and Fixtures, Computers and Equipment and intangible assets like Patents, Copyrights and Computer Software. The useful lives of these assets, as has been enlisted under Part C of Schedule II, are in reference to a single shift of these assets.

( What is the useful life of software as per Companies Act 2013?

This reduction is carried out uniformly at regular periodic intervals. Salvage value refers to the value of an asset when it reaches the end of its useful life. It is also referred to as “scrap value” or “residual value.” Therefore, this value is used to calculate the depreciation in value of an asset using the straight-line method. Depreciation is calculated using the straight-line method by dividing the cost of an asset, less its salvage value, by the useful life of the asset.

motive of Depreciation is to allocate the value of the Asset regularly. The
allocation is performed over the period for which the Asset is used. The
various depreciation rates which should be used for different categories of
assets are mentioned in Schedule II of the Companies Act, 2013. In Income tax, Depreciation is allowed as an expense to the company while arriving at income under the head PGBP (Profit and Gain from Business and Profession) from the year on which Asset is first used.

Depreciation Rates and Provisions as per Companies Act 2013

In the Income Tax Act, the depreciation rate of furniture, plant and machinery has been mentioned for taxation and accounting purposes. The primary objective of this concept is to allow companies to claim deductions against the depreciation in their profit and loss statements. For calculating the depreciation, either the Straight Line method (SLM) or Written Down Value (WDV) is used. Determining depreciation not only helps in knowing the actual value of assets but also helps in stabilising the expenses and revenue of a company. It is because the depreciation is calculated so that the actual current value of an asset can be determined.

It is the amount at which we recognise an asset in the balance sheet, net of any accumulated depreciation and accumulated impairment losses thereon. The useful life of a laptop given under schedule II of Companies Act 2013 is three years. Business can opt any of the below methods of depreciation calculation as per companies act.

Building depreciation rate

Depreciation of a building is the process by which its recorded cost is reduced in an organised way till its total value falls to zero. Only the plot of land on which a building is constructed does not lose its value. All built structures depreciate in value over time as their remaining useful life decreases.

Using an online calculator you only need to input cost of an asset, residual value, method of depreciation, and its life. This refers to buildings acquired on or after 1st September 2002 to make a water supply plant and install machinery for it. Other than that, this type of building can be used as a water treatment system. This building needs to be put to use for the business of providing infrastructure facility as per section 80 IA is chargeable with a special depreciation rate of 100%. Even when the value of a structure depreciates with time, the value of land reacts inversely.

If this resultant value is negative, the company is running with losses. The Income Tax Act, 1961, prescribes the calculation of depreciation as per the concept of “blocks of assets” using the written down value (WDV) method. The Companies Act, 2013, refers to the calculation of the useful lives of different classes of assets. This calculation of depreciation using the useful life determination or the number of units as a determinant of useful life is known as the “Unit of Production (UOP) Method.” These are specified under Schedule II of the Companies Act, 2013.

Since Income Tax Act allows a deduction on depreciation of an asset utilised in a business in the profit and loss statement, it is essential to calculate the depreciation as per the prescribed regulations. Under the Income Tax Act of 1961, the term furniture also includes fittings. Wiring, light fixtures, fans, and sockets are some of the common examples of electrical fittings. However, in most cases, the WDV method is broadly utilised for calculating depreciation. If you are wondering about the depreciation rate of furniture, scroll down.

Therefore, its meaning must be taken in its true grammatical sense and judicial interpretation. ‘‘Continuous process plant’’ means a plant which is required and designed to operate for twenty-four hours a day. (ii) the useful lives of the assets for computing depreciation, if they are different from the life specified in the Schedule. Depreciation in accounting terms is defined as the reduction of an asset’s value due to wear and tear, obsolescence or regular usage. “Continuous process plant” means a plant which is required and designed to operate for twenty-four hours a day.

In this article, we have shed light on the significance of depreciation, methods of depreciation allowed under the Act, and Depreciation calculator to calculate depreciation amount accurately. Depreciation as per Companies Act, 2013 is applicable for assets purchased on or after 1st April 2014. It only prescribes the useful life of different assets and does not provide any specific depreciation rates.

Depreciation plays a significant role in financial reporting under the Companies Act 2013. Understanding the guidelines and computations specified in Schedule II is crucial for businesses to maintain accurate financial records and comply with legal requirements. NOTE – However companies are free to adopt a useful life different from what specified in Schedule II and residual value more than 5%.

It is calculated based on the block of assets at the rates specified in the income tax act. If we were not to charge depreciation at all, then we would have to write off all the business assets as an expense, as soon as we purchase them. This would result in large losses in the months when the transaction occurs, followed by unusually high profitability in those periods when the corresponding amount of revenue is recognized, with no offsetting expense. Thus, a company that does not use depreciation will have extremely variable financial results. Depreciation is a measure of loss of value of a depreciable asset arising from use, the passage of time or obsolescence either through technological or market changes. Depreciation is charged in a fair proportion of the depreciable amount in every accounting period during the expected useful life of the asset.

Suppose XYZ Ltd purchased a building on 1st April 2000 for Rs 100,000. The company was charging depreciation on the Straight-line method @ 1.63% as per the rate of depreciation prescribed in the Companies Act, 1956. It specifies that intangible assets shall be amortized as per the provisions of AS – 26 (Intangible Assets). AS – 26 specifies that intangible assets should be amortized in the ratio of future economic life of the asset.