Session 10 - Practice: Significance of Depreciation

Session Plan : Practice: Significance of Depreciation

1️⃣ 0–5 min: Quick recap of the meaning and causes of depreciation.
2️⃣ 5–15 min: Introduce the significance (importance) of providing depreciation.
3️⃣ 15–30 min: Discuss practical examples and class activity on identifying its effects.
4️⃣ 30–40 min: Demonstrate journal entries and show impact on profit and balance sheet.
5️⃣ 40–45 min: Recap and evaluate with 5 key questions or a short quiz.

Lecture Material : (PDF, PPT)

Learning Material (IV Quadrant Approach)

(Q1) : Text and Image based Content (PDF/Image Formats)

Detailed Notes on “Significance of Depreciation”

1. Meaning of Depreciation

• Depreciation is the systematic reduction in the value of a fixed asset over its useful life.

• It reflects the portion of the asset’s cost consumed during an accounting period.

• Example: Machinery worth ₹1,00,000 with 10-year life → ₹10,000 per year depreciation (Straight Line Method).

2. Significance / Importance of Depreciation

Aspect Explanation Practical Significance

1. True Financial Position     Depreciation reduces asset value to its real worth. Ensures assets are not overstated in the Balance Sheet.

2. True Profit Measurement     Without depreciation, expenses are understated. Helps show correct profit for the year.

3. Asset Replacement Fund     Depreciation acts as a charge that can be saved for replacement. Ensures funds are available when the asset becomes obsolete.

4. Legal and Accounting Compliance Accounting standards (AS-10, IAS-16) require depreciation. Ensures adherence to legal financial reporting norms.

5. Tax Deduction Benefit Depreciation reduces taxable income. Helps in tax planning and realistic profit reporting.

6. Accurate Cost Determination Part of product/service cost includes depreciation expense. Ensures accurate pricing and costing decisions.

7. Safeguarding of Capital By charging depreciation, capital is not overstated. Maintains true value of owner's equity.

3. Consequences of Not Charging Depreciation

If depreciation is ignored or undercharged:

• Profits are overstated, leading to wrong dividend declarations.

• Assets are shown at inflated values, misleading stakeholders.

• Replacement of assets becomes difficult, due to lack of funds.

• Financial statements become inaccurate, violating accounting standards.

4. Accounting Treatment

• Journal Entry:

• Depreciation A/c ........Dr 

•   To Asset A/c 

• (Being depreciation charged on asset)

• Effect:

  • Reduces asset value in Balance Sheet.

  • Treated as an expense in Profit and Loss Account.

5. Example (Practice Focus)

A company purchases machinery for ₹1,00,000 on April 1, 2020.

Estimated life = 5 years, Scrap Value = ₹10,000.

Depreciation per year = (₹1,00,000 – ₹10,000) ÷ 5 = ₹18,000.

After 3 years → Book Value = ₹46,000.

This shows how depreciation affects both profit and the asset’s book value.

6. Real-Life Significance (Practical Insight)

• Used for budgeting and investment planning.

• Enables companies to maintain operational efficiency by replacing old assets.

• Provides accurate profitability and tax computation.

• Builds confidence among investors and auditors through transparent reporting.

(Q2) : Video Based Content (Youtube)

(Q3) : Formative Assessment (Google Form/Any Other Online Quiz Platform)