Depreciation amount (Urgent)

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(Querist) 21 March 2011

Dear All,

Please answers the following queries:

1 .For finalising the balance sheet, which method of depreciation we used? (Income tax law / company law)

2. For calculating the amount of depreciation, which method is used?

3. suppose we have purchased a computer hardware of Rs. 3,60,000/- dated 1st June 2010. life of assets is 3 years. Please let me know the amount of depreciation booking.

thanks & regards
Ravi Kant

CA Namrata Dedhia (Expert) 22 March 2011

Answers to your queries are as under -
1. Under Income Tax, WDV method is required to be followed. Under Company Law, SLM or WDV method can be followed and according to the method used, different rates are prescribed.
For a company, following rates as per Company Law for finalising Balance Sheet is mandatory. Any other (proprietor, partnership firm, etc.) can follow any method and rates of depreciation. But for convenience, we normally follow Income Tax rates in such cases.

2. For amount of depreciation, you will use rates prescribed in the method you select in pt 1 above. If you follow Company Law, depreciation is calculated for number of days the asset is used. Under Income Tax, full depreciation is calculated if asset is used for more than 180 days, else half depreciation is allowed.

3. For computer hardware,
Under Income Tax Act, depreciation - Rs.2,16,000/-
Under Company Law, depreciation (WDV) - Rs. 1,19,934/- or depreciation (SLM) - Rs. 48,603/-

ravi (Querist) 22 March 2011

Thank you so much Namrata ji.

Please answers the following questions also:
1. We consider the life of assets at the time of calculating Depreciation or not.

2. We can book the depreciation in the books monthly. Or at the time of closing books, we need to book depreciation for the whole year.

3. Depreciation amount will be booked same as in the books or amount used at the time of calculating income tax.

Thanks & Regards
Ravi Kant

CA Namrata Dedhia (Expert) 22 March 2011

Dear Ravi Kantji,
1. Life of assets is not normally considered for calculation of depreciation. The rates prescribed under Income Tax and Company Law are given after considering the general life of assets in a particular category. However, in certain situations, you may calculate your own depreciation rate based on the life of the asset justified by a proper note. But this can be done only in books of accounts and not for Income Tax purposes.

2. Booking of depreciation monthly or yearly is only a matter of your internal accounting systems and procedures. Normal convention is yearly booking of depreciation. But for MIS purposes, you may book and reverse depreciation on a monthly basis.

3. For companies, depreciation as per books and depreciation for income tax purposes will be different since you will have to use Company Law rates in the books. For partnerships, proprietors, etc., you may use Income Tax rates in the books also to avoid double calculation of depreciation.

Hope your queries are answered.

ravi (Querist) 22 March 2011

Thanks once again CA Namrata ji.

Please let me one more thing, is there any particular rule for capitalization of assets. Any amount or life of assets given by income tax law or company law.

thanks & Regards
RAvi Kant

ravi (Querist) 22 March 2011

Hi Namrata,

Please let me know how it is calculated both of the amount:

"Under Company Law, depreciation (WDV) - Rs. 1,19,934/- or depreciation (SLM) - Rs. 48,603/- "

Thanks & Regards
Ravi Kant

CA Namrata Dedhia (Expert) 23 March 2011

There is no rule for capitalisation of assets or for life of assets in company law or income tax law. But you can use the general rule laid down in AS 10 for Fixed Assets, where we capitalise the purchase cost and all other cost incurred to make the fixed asset ready for use.

Calculation of Rs.1,19,934/- is Rs.3,60,000*40%(WDV rate)*304/365
and for Rs.48,603/- is Rs.3,60,000*16.21%(SLM rate)*304/365

ravi (Querist) 23 March 2011

Thank you so much Namrata Ji.........

One more it possible we fixed the life of any assets and can depreciate it every year in equal amount.

Suppose a assets value is Rs.3,00,000/-, purchased on 1st May 2010 and life is 3 years. This year we are charging depreciation amount is Rs.91,666/- (11 months) for this year and rest amount in next year. is it possible we can depreciate any assets 100%.

thanks & regards
Ravi Kant

Ravi Kant

CA Namrata Dedhia (Expert) 23 March 2011

Ravi Kantji,

As I have already told, for Income Tax purposes, you HAVE TO use the rate as per the Act. For your books of accounts, you can use rates different from Companies Act based on useful life.

Only those assets can be depreciated 100% which have useful life of only 1 year or which are temporary in nature. For eg., annual books and periodicals, temporary sheds, etc.

ravi (Querist) 23 March 2011

Thank you so much....

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