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Accounting of Depreciation under companies Act, 2013

Today we are going to discuss depreciation under companies Act, 2013. There is an significant change made in companies act, 2013 as compare to Companies Act, 1956 in relation to Depreciation provision. The Provision of companies act, 2013 applicable from the 1st April, 2014.

The new provision of depreciation in companies act, 2013 varies from the accounting standard 6 for Accounting for depreciation issued by Institute of Chartered Accountant of India.

Comparison in accounting of Depreciation as per company Act 2013 and 1956.

Previously under companies act, 1956 depreciation is calculated as per the provision of schedule XIV of companies act, 1956 & it provide for the minimum depreciation rate & two methods of depreciation are given a) Straight line method b) Written down value method but under new act of companies depreciation is calculated on the basis of useful life of assets.

Previously under companies act, 1956 all the assets whose value is 5000 or less can be depreciate at the rate of 100% but in new companies act, 2013 there is no such provision.

Now you think that how we can find the useful life of an assets then no need to take tension because useful life of various assets are prescribed in the schedule II of Companies act, 2013.

Can we show Useful life of asset less than Schedule II of companies act,2013 –

There is no compulsion to use the useful life provided in the act, assesse can use the shorter useful life than provided in the act but assesse has to make disclosure of the same in notes to accounts of company with the reasonable reason for that.

Can we show Useful life of asset more than Schedule II of companies act,2013 –

No assesse can not use the Useful life of asset more than Schedule II of companies act,2013

Major  useful life as per Schedule II

Type of Assets Useful Life of Assets
All plant and machinery other than specifically specified 15
Furniture and fixtures 10
Office Equipment 5
Computer 3
Non-factory buildings 30
Carpeted roads – RCC 10
Carpeted roads – other than RCC 5
Non-carpeted roads 3
Bridges, culverts, bunders 30
Continuous process plant 25

Click here to view rate is details schedule II of Companies act, 2013.

Click here to view company Act,2013

Accounting of Depreciation under companies Act, 2013 of Assets available as on 1st April 2014

Remaining useful life of the assets on 1st April, 2014 comes to zero –

According to companies act, 2013 depreciation should be provided according to the useful life of assets after retaining the 5% as residual value but if the remaining useful life of the assets on 1st April, 2014 comes to zero than written down value of that asset should be charged to the opening balance of retain earnings.

Example of depreciation as per company rule,2013.

Suppose on 31st March, 2014 the value of Furniture is Rs. 30000/-. Furniture is purchased on 1st April, 2004. In new companies act, 2013 suppose the useful life of furniture is 10 years given.

Now the remaining useful life of furniture on 1st April, 2014 is zero but its value on 31st march, 2014 is Rs. 30000/-. As per the new companies act, 2013 you have to write off the written down value of furniture against the opening balance of retained earning.

Following entry is passed here:

Retained earning A/c. Dr.            30000

To furniture A/c.                                         30000

Remaining useful life of the assets on 1st April, 2014 comes to more than zero – 

As per new company act,2013 calculate the depreciation on assets as per the useful life from 01st April 2014 on the carrying value of the assets, Note carrying value the assets is not defined in company law it is defined in the Accounting Standard – 28.

There are two view in calculation of carrying value the assets –

First View carrying value of the assets as per Accounting standard (AS 28)- 

Calculate the carrying value of the assets as per As 28 without considering the 5% residual value

Second View carrying value of the assets   – 

Calculate the carrying value of the assets after  considering the 5% residual value

 

Example of Accounting of Depreciation under companies Act, 2013

Fist view carrying value of the assets as per As 28 – 

Furniture is purchased on 1st April, 2008 for Rs 30,000 and useful life of the assets is 15 year . on 31st March, 2014 the carrying value of Furniture will be  cost of assets less depreciation provided till date.

Depreciation till date = 12,000 (Rs. 30000/15*6)

Carrying value = 18,000 ( 30,000-12,000)

In new companies act, 2013 suppose the useful life of furniture is 10 years given.

Now the remaining useful life of furniture on 1st April, 2014 is 4 years & its  carrying value on 31st march, 2014 is Rs. 18000/-.

Value as on 01st April 2014:    Rs. 18000/-

Depreciation:  18000/4= 4500/-

Following entry is passed here:

Depreciation A/c. Dr.            4500

To furniture A/c.                         4500

Second view considered 5% residual value 

As per the new companies act, 2013 you have to depreciate the assets according to useful life of the assets after deducting the 5% as residual value.

Furniture is purchased on 1st April, 2008 for Rs 30,000 and useful life of the assets is 15 year . on 31st March, 2014 the carrying value of Furniture will be  cost of assets less depreciation provided till date less 5% residual value of the assets.

Depreciation till date = 12,000 (Rs. 30000/15*6)

Carrying value = 16,500 ( 30,000-12,000-1500)

In new companies act, 2013 suppose the useful life of furniture is 10 years given.

Now the remaining useful life of furniture on 1st April, 2014 is 4 years & its  carrying value on 31st march, 2014 is Rs. 16500/-.

Value as on 01st April 2014:    Rs. 16,500/-

Depreciation:  16500/4= 4125/-

Following entry is passed here:

Depreciation A/c. Dr.            4125

To furniture A/c.                         4125

Is Depreciation under company rule 2013 have retrospective effect

No depreciation under company rule 2013 will have prospective effect.

Practical Solution on accounting of  depreciation

In Normally all the cases in  the new company act provide the useful life of the assets less than the useful life prescribed in company act 2013. As discuss we can claim the shorter life of the assets by disclosing the same in notes to accounts. It’s better if the useful life of any assets in new company act  is less than old company act than instead of revised calculation make the depreciation at  same rate and disclose in notes to accounts that we are claiming the shorter life of an assets.

Share this blog if you find useful and You can also View guidance note on Company Audit 2015 for conducting the company audit.

 

 

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One comment

  1. SIR, CAN U SEND US THE RECENT RULES OF THE DEPRECIATION OF THE SOUHARD ACT.

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