Meaning of Depreciation- Before knowing the Depreciation as per Companies Act, we must know the meaning of depreciation. In simple words, depreciation is a reduction in the value of assets over time, due in particulars to wear and tear.
As per companies act 2013, “Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life, where the depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value.
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.
Provision of Depreciation
Under the Income Tax Act and in the companies Act, depreciation is provided on the Fixed Assets.
Under Income Tax, Depreciation is provided on the basis of the percentage (%) of the written down value (WDV) of fixed assets. In the new companies act, depreciation is allowed on the basis of the useful life of assets and residual value. No depreciation rate is given in the schedule.
In this article, we have compiled the useful life of various tangible assets as given in the companies act 2013 and rate of depreciation applicable if assets are purchased on or after 01st April 2014 and residual value as 5%.
- Remuneration and Interest to partners, calculation of book profit under section 40b of the Income Tax Act. 1961.
Depreciation as per Companies Act 2013
Schedule II of Companies Act 2013, is indicative in nature as it indicates instead of specifying the rates of depreciation for various assets and specifies that depreciation should be provided based on the useful life of assets. It also provides 3 depreciation calculation methods, e.g., straight-line method (SLM), Written Down Value Method (WDV), and Unit of Production method.
Companies Act 2013, is applicable for the purpose of depreciation of assets, with effect from 1st April 2014 in the case of a company. The method of computation of depreciation has changed with the implementation of Schedule II. From a rate-based approach, the shifting is made towards the useful life of assets as a basis for determining the rate of depreciation.
Here is the complete chart of Depreciation as per the Companies Act in PDF format, which shows the rate of depreciation on fixed assets as per Schedule II of The Companies Act 2013
Some Comman Assets Depreciation Rates
The depreciation rate is the percentage rate at which assets are depreciated across the estimated productive life of assets.
|Depreciable Assets||Depreciation Rates As per Companies Act|
|Plant & Machinery||18.10%|
|Air Conditioner- AC*||25.89%|
|Mobile Phone||18.10 %|
* Here Air Conditioner and TV considered under Electric Fitting Category
The above depreciation rates are for those assets which are common in nature and used in most of the places, for a complete chart of the assets, you can follow the chart/link given under the current post.
The formula for calculating depreciation as per companies act
Schedule II prescribes the useful life of assets as a base for calculating depreciation. The rate of depreciation shall be determined on the basis of the useful life of an asset as follow-
Straight Line Method (SLM) Formula For Calculating Depreciation
Rate of depreciation = [(Original Cost – Residual Value)/useful Life] * 100 Original Cost
Depreciation = Original Cost * Rate of Depreciation under SLM
Written Down Value (WDV) Formula For Calculating Depreciation
Rate of depreciation = [1-(s/c) U 1/n] * 100
s = Scrap value of assets at the end of useful life
c = Original cost of assets
n = Useful life of assets
Depreciation = WDV * Rate of Depreciation under WDV
Points to Remember
For calculating Depreciation as per the Companies Act, the following points need to remember:-
- Depreciation is calculated by considering the useful life of assets, cost, and residual value.
- Any method WDV or SLM can be used.
- Depreciation method used needs to be disclosed in accounts.
- The useful life of assets needs to be disclosed when it is taken differently from Schedule II.
- If there is any change in assets, which means to say assets are sold, discarded, demolished, or destroyed then the calculation is made according to the date of such events.
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Disclaimer: The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author does not own any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article.
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Compiled by- CA Chirag Agarwal (Practicing Chartered Accountants)