These methods of calculating depreciation are prescribed in the Companies Act, 2013, as well as in the Income Tax Act, 1961. Proceed of vehicle insurance in case of loss of property (vehicle) is computed based on IDV as agreed at the time the vehicle insurance policy is taken. Certain insurance company allow to declare high IDV how it will be involve higher cost in the form of insurance.
Taking the same example, let us calculate depreciation using the straight-line method and then compare the two methods for the same asset X. This article is written by Sushree Surekha Choudhury from the KIIT School of Law, Bhubaneswar. It provides an insight into the concept of “depreciation” as per the Companies Act, 2013, the legal provisions therein, and the methods to calculate it.
But at the same time, you have to understand that with time the car ages and its value depreciates. As soon as you bring your vehicle out of the showroom, the value depreciates by 5% and gradually keeps on falling with each passing year. This depreciation amount is generally considered when you buy or claim insurance for your car or bike. It may be noted that upon transition to Schedule II, the company may have different rates of depreciation for individual assets within the same class in case of existing assets as there will be a different remaining useful life for each asset.
Under this method, we charge the depreciation rate on the reducing balance of the asset. Depreciation as per Companies Act, 2013 is applicable for assets purchased on or after 1st April 2014. It only prescribes the useful life of different assets and does not provide any specific depreciation rates. Depreciation is a measure of loss of value charged as an expense in Profit & Loss A/c. The Income Tax Act, 1961, prescribes the calculation of depreciation as per the concept of “blocks of assets” using the written down value (WDV) method. The Companies Act, 2013, refers to the calculation of the useful lives of different classes of assets.
In this article, we will explore the provisions of the Companies Act, 2013 with regard to Depreciation. Once the total depreciation value is determined, it is subtracted from the company’s total revenue. The resulting difference represents the net income for that specific financial year. The decrease in the monetary value of any object is known as depreciation. For example, a refrigerator is purchased for a price of 50,000 rupees.
However, it is essential to determine depreciation as it causes a change in the loss and profit margins of the company. Ultimately, depreciation and amortisation costs are deducted from the EBITDA to determine the EBIT of the company in that financial year. This is when the depreciated amount of the total assets comes into use. Depreciation and amortisation of assets are calculated and deducted from EBITDA. The term “depreciation” refers to the decrease in the monetary value of any object. Now, after using it for three years, you want to sell it and buy a new one.
The total depreciation amount can be calculated using a car or bike value calculator. The rate applicable to your vehicle will be as per the Income Tax Act and the Companies Act. In Income tax, Depreciation is allowed as an expense to the company while arriving at income under the head PGBP (Profit and Gain from Business and Profession) from the year on which Asset is first used. It is calculated based on the block of assets at the rates specified in the income tax act. As per companies act2013, Depreciation is applicable for assets purchased on or after 1st April2014. It only specifies the useful life of different assets and does notprovide any particular depreciation rates.
As the name suggests, the double declining balance method uses the method of depreciating the value of assets twice at the rate at which they are depreciated under the straight-line method. Thus, the depreciation is calculated as being highest in the first year of calculation and declines in the following years. Therefore, the double declining balance method depreciation on car as per companies act of calculating depreciation is suitable for assets whose value essentially decreases in the first year of use as compared to the following years, like vehicles, heavy machinery, factory equipment, etc. Technically, the assets used for the purpose of business that can depreciate are known as depreciable assets. Over the asset’s useful life, its value is considered a business expense.
This doubled value is the amount of depreciation for the first year of use of an asset as per the double declining balance method. The remaining amount of depreciation is calculated from the years that follow. The remaining depreciation value is divided by the number of years for which the asset will be used, and this total value is multiplied by two. Most of the tangible assets can be depreciated and recorded in the profit and loss account of the company or an entity — for example, machinery, vehicle, furniture, fixtures, equipment, computers, etc. Intangible assets can also be depreciated and recorded as expenses in the profit and loss accounts — for example, computer software, patents, copyrights, etc. Schedule 2 of the Companies Act 2013 only provides useful life of assets tangible in nature.