JAIIB FREE NOTES DEPRECIATION | JAIIB LATEST STUDY MATERIAL 2023
Here, we provide you with an easy way to understand the meaning of depreciation, its causes & need of depreciation to help you prepare for the JAIIB EXAM 2023 from the JAIIB AFM syllabus which has been prescribed by IIBF. The notes are from the JAIIB latest Study Material of JAIIB 2023.
We are sure you will find the below notes from Accounting & Financial Management for Bankers Paper are prescribed below:
WHAT IS DEPRECIATION?
In terms of accounting, depreciation is an expense that is charged to a Profit and Loss Account because there is a fall in the value of an asset every year because it gets used.
Underwritten are some of the characteristics of depreciation:
- It forms a part of the opening cost
- It amounts to a reduction in the Asset Value
- This reduction is on account of its use i.e. Caused by wear and tear or some other reason.
- The reduction keeps on happening on a continuous and regular basis.
CAUSES & NEED FOR DEPRECIATION
Please read the cause and the need for depreciation from the below table:
|Cause of Depreciation||Need of Depreciation|
|Wear and tear because the asset actually uses||To know the correct profit|
|Asset becoming obsolete||To make provision for the replacement of the asset|
|Assets get destroyed in Accidents||To show the correct financial position of the organization|
|The price of assets is going to fall in market price||–|
|Efflux of time||–|
FACTORS OR DATA NEEDED FOR THE CALCULATION OF DEPRECIATION
To calculate the depreciation of an asset, the basic data which is needed is:
- The actual cost of the Asset
- The estimated number of years it will be in use
- Estimated scrap value, it will see when it will be sold at the end of its life
METHODS FOR THE CALCULATION OF DEPRECIATION FROM THE GIVEN SYLLABUS OF AFM 2023 LATEST SYLLABUS
Different methods are used to calculate depreciation by different entities and organizations. The methods which have been prescribed in the JAIIB EXAM 2023 Syllabus are mentioned below:
Straight-line method (SLM): it is a fixed percentage of original cost or fixed installment.
Written Down Value method (WDV): it is a fixed percentage on diminishing balance & sometimes referred to as the reducing installment method.
Sum of years digits method.
|SYLLABUS||STUDY MATERIAL||NOTES||MOCK TESTS|
|Accounting & Financial Management for Bankers Syllabus 2023||JAIIB AFM Study Material PDF 2023||JAIIB AFM Notes PDF 2023||JAIIB AFM Mock Test PDF 2023|
SLM – STRAIGHT-LINE METHOD EXPLAINED
Depreciation is charged as per the straight-line method; the cost of the asset is written off on an equal basis throughout its useful life.
This way, an equal amount of depreciation gets charged every year over the useful period of assets’ life & assets are not useful anymore, its value becomes either nil or equal to their residual value.
Why is this method named after the name it is named?
SLM is also sometimes referred to as a fixed installment or fixed %age original cost method.
The reason why this method is called a straight-line method is that when the amount of depreciation is drawn on a graph along with their corresponding periods, we get a straight line. That’s how it has driven its name.
Suitability of SLM:
This method is more suitable to charge depreciation in the case of lease and in the cases where there is a possibility of accurate calculation of the useful life and the residual value of the Asset.
Use of SLM:
Most of the time what happens is bad because as it is now in the initial years, it requires low expenses on account of repairs but they increase in the subsequent years as the assets get older, leading to an increase in charge on Profit.
If an organization decides to use this method for the calculation of depreciation, the period for which the asset has been used should be considered.
For example: If an asset has been used only for 4 months in 1 year, then the depreciation is required to be charged only for 4 months.
Income Tax purposes: But it is different when income tax is calculated. For income tax purposes if an asset has been used > 180 days in 1 year, then depreciation shall be charged for the full year irrespective of the fact whether it has been used or not.
Advantages of using SLM:
- It is very easy to calculate
- It is easy to understand because there is almost no variation in the amount of depreciation every year unless the asset has been used for less than 1 year.
Disadvantages of using SLM:
Because depreciation is charged equally in all the years, but still, the expenses on repairs and renewal keep on increasing which results in a higher amount that gets charged in the P & L A/C.
Formula to calculate Depreciation under Straight Line Method (SLM):
Amount of Depreciation (p.a.) = [Cost of Asset – Net Residual Value] / Useful Life of Asset
The rate of Depreciation = [Amount of Depreciation p.a. / Cost of Asset] x 100
ACCOUNTING ENTRIES RELATED TO DEPRECIATION:
You can take a look at the accounting entries which are passed in the Journal about depreciation:
|1||The accounting entry for when an asset is purchased:
To Cash A/c
(being asset purchased in cash)
|2.||The accounting entry for charging depreciation on assets:
To Asset A/c
(being depreciation charged on the asset purchased)
|3.||The accounting entry for transferring depreciation to P & L A/c:
Profit & Loss A/c
To Depreciation A/c
(being depreciation charged on assets transferred to P & L A/c at the year-end)
How the figures will appear on the Balance Sheet:
The depreciation A/c (Expense) goes to the debit of the profit and loss account and the Asset on which it has been charged appears at its reduced value in the year-end balance sheet.
THE PRACTICALITY OF STRAIGHT-LINE DEPRECIATION
As we have already mentioned, the straight-line method for the calculation of depreciation is the easiest to calculate depreciation and it can be applied to all long-term assets. But in some cases, it might not reflect the accuracy of the use of the Asset and therefore, might not be suitable for some depreciable assets.
To take an example, suppose if straight-line depreciation method is being used on the computer but due to technological advancements, the computer has met its early demise because depreciation on an SLM basis had required an equal charge of depreciation every year but that is inaccurate because it’s wrong to assume computer has been useful equally over its useful life.
So, this is all about Straight Line Depreciation, entries & suitability. We also have some other notes which can be useful for the JAIIB AFM paper for JAIIB EXAM 2023.