As assets depreciate every year(over time), then what makes up for the assets side on a balance sheet in order to keep balance sheet intact?
Sujan Sareen (11 Points)
20 March 2016As assets depreciate every year(over time), then what makes up for the assets side on a balance sheet in order to keep balance sheet intact?
Swami Ayyappa Nuli
(TAX ADVISOR & CONSULTANT AT G.S.T SUVIDHA CENTER)
(1372 Points)
Replied 20 March 2016
Instead of deducting from asset, Create Provision for depreciation account and each time you provide depreciation then debit to Profit and Loss account and credit provision for depreciation account and shown under Liabilities side of Balance sheet. This assertion is valid for only Non-Corporate assessee as Companies are not allowed to show Gross assets values in their Balance sheets as per Companies act, 2013
CA Raj Doshi
(Practising CA)
(8565 Points)
Replied 20 March 2016
Sujan Sareen
(11 Points)
Replied 20 March 2016
But putting it under liabilities side will reduce a balance sheet. How can a company keeps its balance sheet intact? Is it compensated with depreciation and amortization value which is deducted from P&L account to the assets side of a balance sheet?
manoj
(student)
(5205 Points)
Replied 20 March 2016
if the company is profit making than you dont worry about balance shhet's asset side
from profit either company may have invested in other assets or in bank balance increase
if company is loss making den vice versa means they have redeemed
plus as per AS 6, 10, 28 It is clearly said
book value
-
depreciation
-
impairment if any
we have to show
Max Payne
(employed)
(2569 Points)
Replied 20 March 2016
I think what you are asking, is about the issue of capital maintenance. The purpose of depreciation is manifold:
1. Matching principle - amortising the cost of an asset over the accounting periods during which its benefits will be derived.
2. Replacement of assets - to set apart a portion of profit for replacement of assets at the end of their lives, so as to ensure the capacity isnt drastically reduced at the end of its life, and consequently affect going concern.
3. In taxation - an allowance to encourage investment, compensating a business for the time value of money (so no indexation on depreciable asset)
Capital maintenance - in point 2 above. When depreciation is provided each year, it reduces the profit distributable to owners. There is no cash outflow as a result of this charge to profit. So theoretically, at the end of an asset's useful life, enterprise has set apart from profits, an amount covering "depreciable value", it can sell the asset for "residual value" and, theoretically, have a cash balance to buy a new asset. Thus, the asset side of balancesheet is kept "intact".
The sad part of this theory: even if all profits are realised in cash, depreciation is on historical cost of an asset and ignores its replacement cost. So it doesn't really help you replace assets. Fair value accounting is required to solve this problem.
Max Payne
(employed)
(2569 Points)
Replied 20 March 2016
jatinder kumar
(accountan)
(26 Points)
Replied 24 March 2016
The DTA value is not affected in the balance sheet