Answer to Question #146854 in Accounting for Ka

Question

Depreciation is the reduction in the usable value of fixed assets due to normal wear and tear of time. Depreciation is an indirect non – cash expenditure which is provided on SLM or WDV basis.
Rahul is new junior accountant with Hardwork Mills Private Limited he wants to understand normal depreciation differs from additional depreciation. As a tax adviser, guide him on the two concepts and discus the cases where additional depreciation is not allowed.

Answer 1

Solution:

Normal depreciation is the reduction in the value of an asset over a period of time due to wear and tear. Normal depreciation is treated as a non-cash expense permitted by tax departments globally as a cost of operating expense for businesses. It is reported on the debit side on the income statement of the current accounting period, and it increases the value of the accumulated depreciation.

On the other hand, additional depreciation or accumulated depreciation is the total amount a business has depreciated its assets over time. Ultimately, accumulated depreciation is the total amount of a company’s cost that has been allocated to the depreciation expense from the time the asset was purchased and put into use. The accumulated depreciation amount, therefore, keeps increasing over the years up to the point that the asset is fully depreciated or sold. The accumulated depreciation is a permanent contra asset account that is recorded as a credit balance on the balance sheet. It is presented on the balance sheet as a deduction from the gross amount of fixed assets reported.