UNIT-3: Deepika Assistant Professor, GIBS ROHINI

UNIT-3
Deepika
Assistant professor, GIBS ROHINI
 Fixed assets (technically referred to as “depreciable
assets”) tend to reduce their value once they are put to
use. In general, the term “Depreciation” means decline in
the value of a fixed assets due to use, passage of time or
obsolescence. In other words, if a business enterprise
procures a machine and uses it in production process
then the value of machine declines with its usage. Even
if the machine is not used in production process, we can
not expect it to realise the same sales price due to the
passage of time or arrival of a new model
(obsolescence). It implies that fixed assets are subject to
decline in value and this decline is technically referred to
as depreciation.
 For example, a machine is purchased for `1,00,000 on April
01, 2007. The useful life of the machine is estimated to be 10
years. It implies that the machine can be used in the
production process for next 10 years till March 31, 2016. You
know that by its very nature, ` 1,00,000 is a capital
expenditure during the year 2017-18. However, when income
statement (Statement of Profit and Loss) is prepared, the
entire amount of `1,00,000 can not be charged against the
revenue for the year 2017-18, because of the reason that the
capital expenditure amounting to `1,00,000 is expected to
derive benefits (or revenue) for 10 years and not one year.
Therefore, it is logical to charge only a part of the total cost
say `10,000 (one tenth of ` 1,00,000) against the revenue for
the year 2017-18. This part represents the expired cost or loss
in the value of machine on account of its use or passage of
time and is referred to as ‘Depreciation’. The amount of
depreciation, being a charge against profit, is debited to
Income Statement (Statement of Profit and Loss).
 According to Institute of Cost and Management
Accounting, London (ICMA) terminology “The
depreciation is the diminution in intrinsic value of the
asset due to use and/or lapse of time.”
CAUSES OF DEPRECIATION
 Wear and Tear due to Use or Passage of Time Wear
and tear means deterioration, and the consequent
diminution in an assets value, arising from its use in
business operations for earning revenue. It reduces the
asset’s technical capacities to serve the purpose for,
which it has been meant. Another aspect of wear and tear
is the physical deterioration. An asset deteriorates simply
with the passage of time, even though they are not being
put to any use. This happens especially when the assets
are exposed to the rigours of nature like weather, winds,
rains, etc.
 Expiration of Legal Rights Certain categories of assets
lose their value after the agreement governing their use
in business comes to an end after the expiry of pre-
determined period. Examples of such assets are patents,
copyrights, leases, etc. whose utility to business is
extinguished immediately upon the removal of legal
backing to them.
 Obsolescence: Obsolescence is another factor leading
to depreciation of fixed assets. In ordinary language,
obsolescence means the fact of being “out-of-date”.
Obsolescence implies to an existing asset becoming out-
of-date on account of the availability of better type of
asset. It arises from such factors as:
 • Technological changes;
 • Improvements in production methods;
 • Change in market demand for the product or service

output of the asset;
 • Legal or other description.
 Abnormal Factors Decline in the usefulness of the asset
may be caused by abnormal factors such as accidents due
to fire, earthquake, floods, etc. Accidental loss is
permanent but not continuing or gradual. For example, a
car which has been repaired after an accident will not
fetch the same price in the market even if it has not been
used.
NEED FOR DEPRECIATION
 Matching of Costs and Revenue The rationale of the
acquisition of fixed assets in business operations is that
these are used in the earning of revenue. Every asset is
bound to undergo some wear and tear, and hence lose
value, once it is put to use in business. Therefore,
depreciation is as much the cost as any other expense
incurred in the normal course of business like salary,
carriage, postage and stationary, etc. It is a charge
against the revenue of the corresponding period and must
be deducted before arriving at net profit according to
‘Generally Accepted Accounting Principles’.
 Consideration of Tax Depreciation is a deductible cost
for tax purposes. However, tax rules for the calculation
of depreciation amount need not necessarily be similar to
current business practices,
 True and Fair Financial Position If depreciation on
assets is not provided for, then the assets will be over
valued and the balance sheet will not depict the correct
financial position of the business. Also, this is not
permitted either by established accounting practices or
by specific provisions of law.
 Compliance with Law Apart from tax regulations, there
are certain specific legislations that indirectly compel
some business organisations like corporate enterprises to
provide depreciation on fixed assets
FACTORS AFFECTING THE AMOUNT OF
DEPRECIATION
 Cost of Asset
 Estimated Net Residual Value
 Estimated Useful Life

BENEFITS OF HUMAN RESOURCE ACCOUNTING
 The main benefits of Human Resource Accounting are:-

 HR Accounting helps the company ascertain how much
Investment it has made on its Employees and how much
return it can expect from this Investment
 The Ratio of Human Capital to Non-Human Capital
computed as per the HR Accounting Concept indicates
the degree of Labour Intensity of an Organisation.
 HR Accounting provides a basis for planning of physical
assets vis-a-vis Human Resources
 HR Accounting provides valuable information to
Investors interested in making Long Term Investments
in Service Sector Companies
WHAT IS HUMAN RESOURCE ACCOUNTING?
 Human Resource Accounting is the process of identifying and
measuring data about Human Resources and communicating this
information to the interested parties. It is an attempt to identify and
report the Investments made in Human Resources of an organisation
that are currently not accounted for in the Conventional Accounting
Practices.
 Thus, Human Resource Accounting is a term applied by the
Accountancy Profession to quantify the cost and value of employees of
their employing organisation.
 Objective of Human Resource Accounting
 The Aim of HR Accounting is to depict the Potential of the
Employees in Monetary Terms. This concept can be examined from
2 directions i.e.
 Cost of Human Resources i.e. the expenditure incurred for
recruiting, staffing and training the Quality of the Employees and
 Value of Human Resources i.e. the yield which the above investment
can yield in the future.

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UNIT-3

 • Improvements in production methods;

 • Change in market demand for the product or service

 Estimated Useful Life

 The main benefits of Human Resource Accounting are:-

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