Is it mandatory to calculate depreciation as per Companies Act?

Companies are required to calculate depreciation as per Companies Act as well as Income Tax Act. The methods and amount of depreciation differ under both the statutes.

Is depreciation charge necessary?

We charge depreciation because most of the long-lived assets used in a business have 1) a significant cost, and 2) they will be useful only for a limited number of years. (The U.S. income tax rules allow accelerating the depreciation amounts, but the total cannot exceed the asset’s cost.)

When should I charge depreciation as per Companies Act?

Depreciation is charged in a fair proportion of the depreciable amount in every accounting period during the expected useful life of the asset. As everything loses value over time, we are able to treat depreciation as an expense because it is beneficial to the company, which owns the depreciable assets.

Is depreciation mandatory under companies act 2013?

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.

Is it necessary for a company to use the same depreciation method for all of its depreciable assets?

It is necessary for a company to use the same depreciation method for all of its depreciable assets. The double-declining-balance method is an accelerated depreciation method. Regardless of the depreciation method, the amount that will be depreciated during the life of the asset will be the same.

Is depreciation charged on all assets?

Depreciation is charged on current assets. When market value of an asset is higher than book value, then depreciation is not charged.

What are the reasons for charging depreciation?

The causes of depreciation

• Wear and Tear. Any asset will gradually break down over a certain usage period, as parts wear out and need to be replaced.
• Perishability. Some assets have an extremely short life span.
• Usage Rights.
• Natural Resource Usage.
• Inefficiency/Obsolescence.

What are the main purpose of charging depreciation?

What Is the Purpose of Depreciation? The purpose of depreciation is to match the cost of a productive asset, that has a useful life of more than a year, to the revenues earned by using the asset. The asset’s cost is usually spread over the years in which the asset is used.

When depreciation is not charged on an asset?

Current assets, such as accounts receivable and inventory, are not depreciated. Instead, they are assumed to be converted to cash within a short period of time, typically within one year. In addition, low-cost purchases with a minimal useful life are charged to expense at once, rather than being depreciated.

Do you think companies should be required to use the same depreciation method for both books and tax reporting?

Tax depreciation refers to the amounts reported on the company’s income tax returns and in the U.S. the tax depreciation is based on the regulations of the Internal Revenue Service (IRS). There is no regulation that requires the tax depreciation to be the same as the book depreciation in a given year.

Is it acceptable for companies to use two methods of depreciation?

Yes, many companies use two or more methods of depreciation. It is acceptable and common for companies to depreciate its plant assets by using the straight line method on its financial statements, while using an accelerated method on its income tax return.

How do you book depreciation?

The basic journal entry for depreciation is to debit the Depreciation Expense account (which appears in the income statement) and credit the Accumulated Depreciation account (which appears in the balance sheet as a contra account that reduces the amount of fixed assets).

What are the Depreciation calculations required by a company?

Companies are required to maintain two types of depreciation calculation – one for accounting purpose following Schedule II to the Companies Act, 2013 and the other for taxation purpose according to the provisions of Sec. 32 of Income Tax Act, 1961.

What is the depreciation rate of laptop under Company Act?

As per companies act, the residual value of an asset should not be more than 5\% of the original cost of the asset. Asset purchased is laptop. The useful life of laptop given under schedule II of Companies Act 2013 is 3 years. Substituting the values in the depreciation formula we get Depreciation rate for laptop is 63.16\%

Is Companies Act 2013 applicable for depreciation of assets?

However, Companies Act, 2013 is applicable for the purpose of depreciation of assets, with effect from 1st April, 2014 in case of a company. Method of computation of depreciation has changed with the implementation of Schedule II.

What is depreciation on plant and machinery as per Companies Act?

(6)What is depreciation on plant and machinery as per companies act? Depreciation on plant and machinery as per companies act 2013 is 18.10\% under WDV & 6.33\% under SLM. For depreciation rates on Special plant and machinery, refer the Schedule II given above.