Calculation of Depreciation as per Companies Act, 2013

Gurleen Kaur | Last updated: 04 August 2022

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Quick Summary

The Companies Act, 2013, provides guidelines for calculating depreciation, defined as the systematic allocation of an asset's cost over its useful life. Key factors include the asset's original cost (excluding GST if input tax credit is claimed), its residual value (capped at 5% of original cost), and its useful life. The Act also outlines how to handle depreciation for assets bought or sold during the financial year on a date-wise basis.

The Depreciation Formula and the useful life is being provided in Schedule II of Companies Act, 2013 to calculate the rate of depreciation as per Companies act.

MEANING OF DEPRECIATION

As per Companies Act, 2013 “Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value”

NOTE - COST OF ASSET is to be consider by EXCLUDING the GST PORTION if you HAVE CLAIMED the INPUT TAX CREDIT on the asset whereas if you HAVE NOT CLAIMED the INPUT TAX CREDIT then COST OF ASSET must be INCLUDING the GST PORTION.

Companies Act 2013: Calculate Depreciation Easily

MEANING OF USEFUL LIFE

The useful life of an asset is the period over which an asset is expected to be available for use by an entity, or the number of production or similar units expected to be obtained from the asset by the entity.

MEANING OF RESIDUAL VALUE

It specifies that the RESIDUAL VALUE OF AN ASSET SHALL NOT EXCEED 5% OF ITS ORIGINAL COST.

NOTE - However companies are free to adopt a useful life different from what specified in Schedule II and residual value more than 5%. The financial statements shall disclose such difference and provide justification in this behalf duly supported by technical advice.

TREATMENT OF SALE AND PURCHASE OF FIXED ASSETS DURING THE YEAR

If there is any addition to the asset or asset is sold, discarded, demolished or destroyed then the calculation is made according to the date of such event. In other words, if any asset is purchased or sold then the calculation will be made according to the date of purchase or sold i.e., date wise calculation is to be made.

AMORTISATION OF INTANGIBLE ASSETS

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.

FORMULA TO CALCULATE RATE OF DEPRECIATION USING WRITTEN DOWN VALUE METHOD
Rate of Depreciation = 1- (Scrap Value of the Asset at the end of its Useful Life ÷ Original Cost of the Asset) ^{(1÷Useful Life of the Asset)}

Please find the attachment of the Depreciation Chart as per Written Down Value (WDV) Method.

Attached File : 2783678_47549_depreciation_chart.xls